The Media and the Internet

Each Monday I post the next section of my 2001 book, which was originally called (by the publisher) Hoover’s Vision but which I have now retitled The Art of Enterprise. I have posted over half of it already; click on the “Monday” column to see all the prior sections. The entire book can be downloaded as a PDF for $10 at





36 The Media and the Internet


Content versus “Technology”

The twentieth century may be remembered as the era when show business became big business. One hundred years ago, vaudeville and baseball were part of the American scene. But they were economically trivial compared to, say, railroads or agriculture or mining. Today, cable and television broadcasting employ more people than the railroads. Professional sports has become a global obsession. Entertainment, from video games to music, is a multi-billion-dollar business. And the global spread of the entertainment industry has barely begun.
In times of change, some types of media will rise while others will fall. Newspapers began their long decline even before the advent of the Internet, and circulations continue to drop. Books, on the other hand, have remained fairly strong in aggregate demand. While the future may see books becoming a smaller part of total media sales, the total will rise so significantly that I believe that dollars spent on books will also rise. Most importantly, the underlying demand for content will remain strong. Much like we examined the distribution system in our look at retailing, the media industry needs to continually analyze how content is distributed. If I make a great film, will it earn most of its revenue at the box office, on cable, or at the video store? If I write something you want to read, should it be in Time Magazine, should it be in book form, or do you want to download it? Should my music get to you via Virgin or via Napster (or a paid version of Napster)? And how do those decisions differ by type of content? Might a short story be distributed one way while a list of the ten secrets to real estate sales another?
In the last chapter, I stressed the importance of looking at where each industry fits into the economy. Probably the most helpful way to look at the media is to divide it into two parts: content and distribution (the “pipeline”). Vertical mergers attempt to integrate the two, as in the movie studios’ historic on-again-off-again interest in owning theatres. The most striking vertical deal of all was the acquisition of Time Warner by AOL. Now that the merger is consummated, there continue to be articles debating whether the new AOL Time Warner will be valued as a media company like Time Warner or as a technology company like AOL. The assumption is that a media company is not worth nearly as much as a tech company. I believe this logic is flawed.
To me, AOL is a distribution company, a pipeline. While, as a retailer, I have been a distribution guy most of my life, and happily so, the evidence is that distribution franchises do not have the lifespan of the great product brands. That is, the top retail chains do not remain on top as long as the top ketchup companies. I believe that the durability of retail chains is enhanced by their physical presence on the ground, their bricks and mortar. On the other hand, “virtual” distribution systems (like AOL) do not even have this physical reality to cement their relationship with the customer. While our phone company was our – with a small o – phone company as long as the government protected their monopoly, we began to desert them as soon as the free market was allowed to go to work. Switching long distance services has become easier than changing brands of laundry detergent. The same is now beginning to happen to local telephone services, and may come to the electric utilities.
Similarly, virtual pipelines like AOL, Yahoo, and Internet service providers such as Earthlink and MSN may not be inherently powerful long-term assets. I believe those millions of subscribers may be much more tenuously connected than most observers realize. At the same time, AOL clearly has one of the smartest managements in the industry. They understand that their real value lies in their relationship with their subscribers. They work very very hard to earn the trust and loyalty of those subscribers. Something that rarely occurred to AT&T and the baby Bells. The electric utilities still call their customers “ratepayers.” As long as AOL keeps their focus on their customers and aggressively uses technology in their business, they have a good chance of keeping their powerful position, extending the life of their asset.
But contrast this with Time Warner. This company owns the movie version of Gone with the Wind; they own every production of the Sopranos; they control the rights to all those old Fortune Magazines that I cherish. Thousands of hours of baseball game video archives rest in Turner’s vaults. Margaret Bourke White’s photographs for Life Magazine. Madonna’s music. No one can take these things away. Moreover, every day, Time Warner cranks out more of the same – lots more. Some of very high quality, some not so high. Some has lasting value.
I believe that AOL pulled off one of the great coups of modern deal-making by buying Time Warner at a time when the market had driven AOL’s current stock value way above Time Warner’s, making the deal feasible. In this deal, AOL got one of the greatest corporate assemblages of assets on earth. Now, AOL is beginning to leverage this powerful asset into a benefit for their millions of subscribers. This will be one more way they can extend the life and value of their pipeline, distancing themselves from their many competitors.
But it will not change my belief that the greater lasting value lies in content, not the pipeline. The greater value is in media companies, not in “technology companies” if you define Yahoo and AOL as technology companies. On the other hand technologists Microsoft, Hewlett-Packard, and Dell not only own strong tangible product brands, they own extensive patents and production processes. A little more like ketchup. (At the same time, we know that new technologies will come along and replace the method of the moment, whereas ketchup may outlast them all.)
In a parallel way, I believe that the Disney part of Disney is worth more than ABC, and the Paramount part of Viacom is worth more (relative to “book” value) than the theatres owned by the same family. Those media companies that combine content and the pipeline – ESPN, MTV, CNN, CNet/Ziff-Davis – may be worth the most of all. (Note that these companies did not result from vertical mergers, they were designed from the outset as one package. Just like Dell is both a computer factory and a computer “store” in one conceptually simple company.)
Do you know where the real value is in your organization? How strong is your “content?”

The Internet

So many books have been written about the Internet and about how it has changed all the rules of business success. What is the right way to look at the Internet? What does a long-term business perspective tell us?
Clearly the Internet is a powerful tool. It stands in the tradition of telegraphy, television, the radio, the telephone, and even the printing press, and is perhaps the most powerful of all these tools, especially given that it has arrived on the scene just as the world is getting freer, wealthier, and more integrated. The Internet is unprecedented in its ability to tie people together instantly and interactively, including high-quality sound, still pictures, video, interactive games, and almost anything else we can dream up. Publishers and retailers who ignore the Net do so at their own risk. So I place myself squarely in the camp of those who see the Internet as a great, great thing.
But the Internet does not revolutionize the laws of economics or consumer behavior. And many companies which are called “Internet companies” are in fact not Internet companies. Amazon is a retailer – a very fine one. At their core, Google is a form of advanced card catalog system, Hoover’s a business information reference, Switchboard a yellow pages and white pages service. Each is part of an industry that existed long before the Internet and will likely exist long after the Internet is superseded by the next technology.

Matching rarities

Of course, the Internet does open up new possibilities. As a supplier of business information, Hoover’s stands in the tradition of Standard & Poor’s and Moody’s, but before the Internet neither of those services could easily be updated every ten minutes, neither could report breaking developments, neither could be customized to each user’s needs.
Amazon is a great service. But even before Amazon, I could have easily bought a copy of the latest New York Times best seller at any bookstore. Selling common things to mass markets is not new magic. On the other hand, if you have a product that only 20 people want, and they live in 20 different countries, no known retail “technology” does the trick. At least not before the Internet.
I’m a book collector. Before the Internet, if you wanted to find a rare or out-of-print book, you could run ads in a few small, specialized publications or visit used bookstores, hoping to stumble across the title you sought. By most standards of efficiency, this system did not work. Today, there are several great websites for finding hard-to-find books, led by the awesome This site lets you search through 28 million books in over 8,200 dusty bookstores around the world by title, by author, or by any keyword – instantly. Click in your VISA card number and the book is on its way to you. Truly remarkable.
EBay is another great Internet resource built around matching hard-to-find products with hard-to-find customers. Much has been written about eBay, most of which perpetuates two myths: that eBay is an Internet company, and that it is an auction company.
As for the first myth, you can anticipate my objection. EBay happens to take advantage of the most current communication technology, but there’s no reason why eBay must be forever linked to the Internet. If the Internet is superseded by some more efficient technology, eBay will follow.
Concerning that second myth: auctioning is just one of many ways to set the price of merchandise. Most of the things bought and sold in the world are priced in one of two other ways – through haggling (negotiation) or through fixed prices (marked on the item, with no debate). EBay’s customers, like all consumers, are accustomed to all three pricing methods, and there’s no special reason why prices on eBay need to be set through auctions. In fact, today, 30% of eBay transactions are done at pre-set prices rather than via auction, and that percentage is likely to grow.
Other Internet opportunities. The Internet’s power to connect hard-to-find products with hard-to-find shoppers is simply an aspect of its power to link people in communities of interest. While conventions and other face-to-face gatherings will continue to be an important part of the way we build communities, no tool is as powerful as the Net for bringing together people from around the world who have something special in common.
Everyone knows that the Internet has greatly facilitated research and learning. But there is still a lot of information that is not available on the Internet. When using the Internet in doing research for this book, I sometimes began to feel as if nothing had happened before 1995. It will be decades before all the old books, articles, databases, historical archives, government and corporate records, and other vital documents are digitized and placed online. And what about those shoeboxes full of pictures under your bed? Or those 78-RPM records in your Mom’s attic?
Despite the rhetoric (“The train is leaving the station!”), there’s still plenty of room for more successful enterprises that use the Internet as a medium of communication and commerce. Hundreds will be founded in the years to come. Most of those business will not in fact be Internet companies. They’ll be used-car companies, music publishers, schools and museums, travel agents and financial planners – every kind of business, in fact – that are similar only in using the Internet more effectively than their competitors. Of course, there are some true Internet companies – namely, the providers of the software and hardware that supports the Internet and its expansion into broadband, companies like Oracle, Cisco, and Corning. These companies can prosper by making tools, just as Dell, Black and Decker, and Microsoft have. But those who creatively apply those tools often profit the most.

More about the Media

Very few industries have a good reference book available about the current state of the industry. This business has two: Who Owns the Media? Concentration and Competition in the Mass Media Industry by Benjamin M. Compaine and Douglas Gomery and Entertainment Industry Economics: A Guide for Financial Analysis by Harold L. Vogel.