Digital Churns: Zynga, Spotify & the Downward Dog

My boss told me some years ago that, if you hang around long enough, every business model will come back either as a bang or a whimper.  His bone of contention was whether a company should be centralized or decentralized.  He gave each type of organization a half-life of about six years until the dreaded consultant came to town and recommended, with great sobriety and cost, the other thing, whatever it happened to be.

I read recently that those launching new businesses should focus much more on the vision and less on the business plan.  I think this advice had its genesis in the Harvard Business Review and was retweeted until it became established wisdom.  It might be time to bring the consultant back to town.

I served as the business development guy at Hachette during the dot com run-up.  Since there were few rules during this prairie fire, I tended to meet with everyone who had invented the next big digital thing.  I soon learned that pets, used clothing, supermarket coupons, and death were the subjects that were getting a lot of attention from the newly formed digital elite.  I had worked at a boutique private equity firm and thought I had enough of a “cunning nose” for new business opportunities, but this was a brand new toy.  I finally decided that for these entrepreneurs to get through the front door, they would have to convince me before a meeting that their Cost of Sales (COS) did not equal or exceed their total revenues by year three.  The foot traffic slowed down to a crawl.  I never got to ask about Average Revenue Per User because it was always somewhere down the road.

The WSJ ran a piece a month ago about Spotify’s plans to launch in Canada (August 22, 2012, “Spotify to Launch in Canada”).   CNET’s Greg Sandoval dug a little deeper into the numbers and asked in his piece, “Is Spotify’s Business Model Broken?”  I have blogged in the past that I thought magazine publishers can learn something from Spotify and still do.  But I was struck by some of the key financial ratios Sandoval focused on with his keen eye and cunning journalistic nose.

Spotify’s Total Revenue for 2011 was $244,539,608; its Cost of Sales for the same period, $238,913,983, or 98% of revenue.  Unlike most of the pet sock folks I met over ten years ago, Spotify has real revenue and plenty of new markets to exploit. But at the end of the day, so to speak, the Cost of Sales and specifically the cost of acquiring new members and, conversely, the Average Revenue Per User (for 2011 at about 5.73 Euros) will tell the tale.  As Sandoval observes, the fly-in-the-ointment might be the royalty payment due even when the offer is free.

Money continues to pour into the venture game; $24.4 billion in 2011.  And at the same time we hear the diurnal lament or prediction that the disruptors of a few years ago will now start taking their place on the disruption stage.  This was certainly the talk, even in the mainstream media, about Facebook after its post-IPO stock price fell.  Forget about Facebook’s one billion users.

Equally interesting was Josh Constine’s October 5, 2012, piece in TechCrunch about “Why Zynga Failed,” a title delivered emphatically in the past tense.  As a kid, I spent enough time on a dairy farm and had no desire to relive my cow-milking blunders with the Farmville fantasy, though I have been tempted to invest my virtual wallet in Emus as a specialty crop.

Constine reminds us that in 2008-2009 Zynga was on top of the world with Facebook as a game portal, CPCs low ($0.27), and hockey-stick growth on the office wall.  He ticks off four reasons for this “failure”: games got too complicated; too many developers, not enough software gamers; CPCs have increased more than 3X since 2009; Facebook got sick of game spam; with Facebook taking a 30% cut, margins got smaller.  Whatever we might think about this prediction, Zynga’s stock has dropped to $2.48 as of this writing from $10 ten months ago.

A writer on the TechCrunch comments page even suggested an official Constine’s Law: “Internet advertising margins are proportional to the size of the user’s screen.”  As these things go, this is high praise, especially for a site that has received criticism by those who think it is too uncritical about tech startups.  Zynga executives might want to read some of these informed comments that charge the company is beginning to look a lot like AOL, MySpace and Blackberry, has based the empire too much on Flash, needs to develop more advanced games, and should bring back the original talent pool.  They might want to ignore those who suggest Zynga’s time had come and gone and management has “screwed the pooch.”

Pets, especially dogs, seem to have a deserved place in digital hierarchy.

Re-Visioning Digital Content: Time Inc., Forbes & The Atlantic

I mark the beginning of my digital education more than twenty years ago when an executive at Hachette USA (now owned by Hearst) asked me how to spell dot com.  He was on his way to give a luncheon speech about digital strategy and wanted to start out on the right foot.

In the late 1990s, Hachette was no different than most companies.  It invested in a number of digital startups, including enews.com (a digital subscription platform eventually sold to B&N), endured the internecine warfare between print and digital, and over time made the digital incubator part of the mainstream business.  Echoes of these strategies, disruptions, and hiccups can be found in most publishing companies of size.  It simply took publishers a long time to understand digital, get on the right side of the browser wars, figure out how to sell subscriptions at scale and develop the technical savvy to be able to deliver content to all platforms, such as Time Inc.’s All Access effort, an industry blueprint.

Laura Lang, Time Inc. CEO, recently announced that the company would focus on global growth, growing paid content and creating a broader consumer content experience.  To help with the latter, the company had introduced Amplify, a new digital ad unit, some months ago.  Amplify “marries” editorial content with brand marketing messages.  Given the company’s ability to layer subscriber data with social and behavioral, this promises to become a very interesting platform.

Pat Corpora, a friend who ran Rodale’s book division some years ago, started most strategic meetings with the observation: “What you propose will cost twice as much as you suggest and take at least twice as long as your propose.”   He was usually right, but he might have to expand his time frame for digital.  Soon I’m going to write a book on the psychology of digital, focusing on the generational, societal, cultural and organizational impediments to the movement.  Inertia has enjoyed a long and successful career.

It is no secret that for a long time magazines looked at digital through the print lens and digital products became add-ons to the central business.  Some still do.  What is most heartening these days is that magazines are changing their business models and, God forbid, even rethinking the church/state nexus.  This is hinted at in the above remarks about Time Inc.’s effort to “marry” editorial and marketing messages.  This will help consumer marketers become more adept at marketing to digital consumers.

These Time Inc. initiatives bode well for the industry because the company is an industry leader and is surely its first citizen.  But it’s equally important to note that other companies, often smaller and more nimble, are making interesting structural moves by re-visioning content, sometimes in dramatic ways. GigaOM’s Matt Ingram tells us that there are five reasons we should pay attention to The Atlantic as the company pushes the transformation to digital.  They include: creating web native offerings rather than apps, new forms of content like the Atlantic Wire, and native advertising or more specifically, branded content that looks like what the content readers are used to.  

I have previously blogged about Forbes’ effort to re-think content.  Forbes has done this more substantially and more elegantly than any magazine or content producer I know.  And Lewis D’Vorkin is the Forbes evangelist.  In describing Forbes’ new home page, D’Vorkin explains that each magazine constituency “is represented in one of four equal modules, or as we call them, stacks.”  These include: the Journalistic Agenda:  Forbes is a brand that has meaning; the Social Agenda, which is based on Forbes’ Velocity, “an algorithm that weighs page views, sharing and comments;” the Individual User’s Agenda: personalization with serendipity; and the Marketer’s Agenda: brands are publishers, they create content, and are experts in their fields.  For marketers, Forbes provides a perfectly transparent AdVoice platform.  According to published remarks by Forbes CEO Mike Perlis, this platform will also have very high content standards.  They won’t be publishing just anything.   D’Vorkin has written that this advertising trend will shake up 100 years of journalism.  I think he’s right.  

Other magazines will find their way to this place.  There is a lot of experimenting going on.  Good magazine, launched in 2006 and shut down a few months ago to predictable headlines, is coming back to life as a community platform named Good.is.  According to a variety of published reports, Good.is will leverage Jumo, a social activist platform acquired from Facebook co-founder Chris Hughes.

I have no idea whether this will work.  What I find interesting is the effort to develop a community, aggregate this muscle, and in turn create branded sponsorships around calls to civic and social action.  This seems an ingenious, viral and legitimate “social” way to bring brands into the conversation in a manner that will extend the brand and help underwrite the business.  The effort might take the form of branded challenges.  Apparently IBM, Toyota, and UPS are interested.

I’ve sat through too many meetings where the very thought of using what is called “deep advertising content” was dismissed out-of-hand.

 

Three cheers for the companies that are re-visioning content and re-thinking their business models from the ground up in elegant and profound ways.