Have you transformed your business?

DDM transformed: A five year retrospective

Clark Gilbert, CEO, Deseret News & Deseret Digital Media | @ClarkGilbert | December 2, 2014

Deseret Digital Media (DDM) launched five years ago this January. Over those years I have seen many observers dismiss the transformation at Deseret Digital Media with claims that we are “different.” The comments range from “They must be subsidized” to “Their religious orientation somehow compels their markets to buy their products or subscribe to their websites.” If only either of these misperceptions where true!

The reality is we operate in competitive markets and are very much a for-profit entity. And while we are different, it is not on the dimensions many imagine. As Harvard scholar Michael Porter has described: “Strategy is about making choices, tradeoffs; it’s about deliberately choosing to be different.” But even as we swim against that current, there are a host of other companies we admire, benchmark, and even share innovation practices with quite regularly. These companies range from newspaper groups like Schibsted and Russmedia in Europe to magazine companies like Forbes in New York and the Atlantic Media Group in Washington, D.C. And while each of these companies has unique editorial profiles, they share one thing in common: they have all transformed their business models and are likely to not only survive, but to see sustained profitable growth.

Rather than debate what appear to us as empirically robust innovation principles, I decided to focus this article on a very simple idea: Have you transformed your business? With that simple organizing framework, I then ask four measurable questions that speak to this concept:

If you can’t answer these questions in a compelling way, you may be making managerially heroic efforts. You may even be working with some very innovative people and smart product concepts. However, you are not proving successful in answering the more fundamental question: Have your transformed your business? Let’s look briefly at each of these four key questions with some expanded rigor:

What percent of your business comes from digital?

(Hint: Should be approaching 33 percent)

Using this standard, only a handful of newspaper companies can say they have transformed their business. Borrell and Associates has done an analysis of traditional media companies looking at the percentage of advertising revenue coming from digital. The study revealed that the average newspaper company generates only 11 percent of its advertising revenue from digital, one-third of the target I’ve suggested for business model transformation (See Exhibit 1). Only a handful of newspaper companies can claim 25% of their ad revenue comes from digital. Two of those newspaper groups are national brands — The Washington Post and The New York Times Company. The only metro market company over 25 percent is McClatchy, which has shown significant digital leadership under Chris Hendricks and a recurring pattern of investment in key digital initiatives.

Exhibit 1

These data are a percent of advertising revenue and not a percent of total revenue. They are also only for U.S. public companies. When we expand the data to look at the higher standard of percentage of total revenue, newspaper companies like Schibsted and Russmedia standout. A recent Media Briefing profile comparing the transformation of Schibsted to the New York Times Company suggests that over 55 percent of Q3 2014 revenue at Schibsted came from digital. Publications like the Atlantic and Forbes have been reported to be generating over 33 percent and 50 percent of total revenues respectively from digital revenues. Deseret Digital Media is approaching this same range when comparing digital revenue to its combined legacy newspaper and TV properties. More importantly, digital revenue has a higher operating margin, which means that digital is an even higher share of total profitability. I do not have access to line-level digital profit numbers across organizations, but would suggest to other executives for their own internal analysis that revenue measures remain simply a proxy for the much more important operating profit metric.

Of the digital business, what percentage comes from non-display revenue streams?

(Hint: Should be over 50 percent)

Several years ago a good friend and senior executive from a prominent newspaper group came to me with the following analysis: “When I do the math on our total page views, multiply by the ad units per page, multiply again by a healthy CPM rate, I don’t get to the kind of numbers that will transform our business.” In fact, the percentage of revenue came to about half of what I have suggested media organizations need to get to transform their business. This calculus led this individual to pull digital back into his print organization and begin cutting costs from digital. Unfortunately, while his math was entirely accurate for display revenue, it was off by about half of the total revenue target of 33 percent because it missed an entire category of revenue: a non-display category we call Marketplace businesses.

In the previous discussion of Schibsted, one number that should jump out to you is the 55 percent of total revenue coming from digital. Not surprisingly, the vast majority of that revenue is coming from the Schibsted classifieds business, not from online display revenue. At Deseret Digital Media, over 50 percent of our revenue now comes from classifieds (cars, jobs, homes) and other marketplace businesses (deals, travel bookings, business listings). In other words, we are now far less dependent on display revenue than we were just three years prior.

Much has been made of Deseret Digital Media setting up a separate group for digital. However, less well known is the fact that we have a separate team within DDM to focus on our Marketplace businesses. Not only is this team not from the newspaper business, it isn't from the digital publishing business either. Our marketplace team, led by Eric Bright, brings e-commerce experience including from eBags, Overstock.com, Classmates.com, and other leading e-commerce businesses. This team doesn’t focus on page views and CPM rates. They are obsessed with paid listings, consumer transactions and conversion funnels (See Image 1 below).

Image 1: DDM Marketplace Team

Jennifer Land leads a team meeting of the DDM Marketplace team in Salt Lake City. The Marketplace team is comprised of people with e-commerce (not digital publishing) backgrounds.

Is your digital business still growing at double digit percentages?

(Hint: Should be “Yes.”)

Exhibit 2

One of the more remarkable data slides I’ve seen in the last few years is Mary Meeker’s summary of industry revenues (See Exhibit 2). From 1950 to 2000, newspaper industry advertising grew from $20 billion to $60 billion. Then from 2000 to 2012, the industry shrank back to $20B, more than a $40 billion drop. What took 50 years to build was destroyed in about 10 years. But just as remarkable in this analysis of print ad revenue is the almost negligible growth in online newspaper revenue (see the red line in Exhibit 2). Despite all of the investment, machinations, experimentation, and collective mindshare that has occurred across the newspaper industry, online revenue remains barely above 10 percent of total advertising revenues. This revenue is non-trivial for sure, but hardly something that will change the trajectory of the industry trend line. It is definitely not evidence of business model transformation.

Exhibit 3

Tragically, the anemic growth of newspaper online digital revenue does not reflect the overall growth in the market. Online advertising has not only passed newspaper advertising, but it has also passed broadcast advertising to become the No. 1 category of ad spending in the market (See Exhibit 3). As further evidence that the industry remains stuck in a traditional business model, online revenue growth rates for many newspaper companies remains in low single digits to flat. In his very compelling column on the newsonomics of the industry, Ken Doctor pointed out earlier this year that online revenue for the industry grew by barely 1.5 percent from the previous year. That caps a disappointing four year trend:

Companies like Forbes, the Atlantic, Schibsted and others who are transforming their business models continue to grow digital revenue at double-digit rates. And while the digital revenue at DDM is not growing at the same rate that we started with — our compounded annual growth rate from 2010 to 2014 was around 30% — we continue to realize strong double digit growth. Note again, however, that if we only had digital display, our growth rate would be in the high single digits. It is our Marketplace revenue (over 50 percent of our total) that continues to grow more rapidly and keeps our total growth rate in the double digits.

What percent of your traditional business (non-digital) comes from revenue streams not tied to the newspaper itself?

(Hint: Should be approaching 50 percent)

At the Deseret News and Deseret Digital Media, we speak of two transformations: Transformation A is focused on the traditional business while Transformation B is focused on the new digital business. Most of this article has been focused on our digital transformation. However, there is also significant transformation happening in our traditional business that is not digital, nor is it tied to the newspaper itself.

Brent Low, who runs our newspaper business in Salt Lake City, has been a pioneer of these Transformation A businesses. Toward this effort, Brent has launched or grown businesses that have nothing to do with the circulation of our newspaper itself. These businesses include coupons, events, niche magazines, custom publishing and direct mail. In 2010, these businesses accounted for barely 25 percent of our business. Today, they are approaching nearly 50 percent of our business and those lines will cross next year. Brent does not run our digital businesses, but he is focused on maintaining the traditional print business while growing these new types of Transformation A businesses that draw on the brand halo of the traditional newspaper but are revenue independent from the core newspaper business.

Transformation in a Picture

Perhaps the best way to summarize each of these four questions is in a picture (See Exhibit 4).

When you integrate each of the four questions outlined you see the full picture of transformation. First, you see that digital revenue becomes one-third of total revenue (Question 1). Half of this revenue comes from e-commerce Marketplace businesses (Question 2), which allows the business to still show strong double digit growth (Question 3). The new non-newspaper businesses are half of the traditional business (Question 4) or one-third of total revenue and include coupons, events, niche magazines, custom publishing, and direct mail.

These new businesses need to grow at 5 percent or higher to offset declines in the print newspaper. Digital then becomes the growth business behind a stabilized local core business. Taken together this becomes a picture of transformation and a profile of a sustainable growth business.

One Final Question

Each of the four questions discussed in this article are outcome-driven — they measure whether transformation has worked. In fact, the mathematics of a transformed business model are actually reasonably straight forward — transformations in the traditional business offset print newspaper declines while digital transformations outside of the core business enable overall growth of the enterprise.

This brings us to a final question: Are you organized to innovate in a way that allows transformation? So often we have guests come to Salt Lake City to study what we are doing. Many times they look at innovations in our marketplace products or our success with native advertising or new mobile ad products we are developing. Unfortunately, most of those innovations are outcomes, not causes. In other words, they grow out of an underlying decision to organize for transformation from the ground up.

We will continue to share product level insights with our peers in the industry, but DDM is not a collection of product innovations. Rather we are the culmination of an organization that deliberately decided to transform its business model by creating a separate business rather than integrate within the existing business. We also remain committed to an organizational culture designed for constant reinvention in ways similar to that described by Lewis D’Vorkin at Forbes.

It is these decisions that make us unique from so many in our industry. And yet, we are not alone in this decision. You see that same rigor in a handful of organizations including Forbes, Schibsted, Russmedia, and others. In the thoughtful Media Briefing piece mentioned above, Chris Sutcliffe compares the efforts at the New York Times Company to the transformation at Schibsted. While acknowledging the progress being made at the Times, the author points out: “[U]nlike Schibsted, where digital and print are largely separated, the NYT’s digital output is inextricably linked to print content that remains at the heart of its core brand.”

That strategy may allow the New York Times to survive, but it will not allow the Times (or other newspapers) to ever lead again unless they reorient their organization. That so many fail to understand this underlying nuance reveals not only a difference in strategy, but a failure to answer our underlying question in this article: Have you transformed your business?