Borrell’s Blog

By Colby Atwood

Imagine you are an entrepreneur setting up an advertiser-supported Web site in your community. Now imagine that you are in a meeting with some prospective investors and you tell them, “We’re going to sell ads only to those businesses that happen to be advertising in the newspaper these days.” You’d be crushed in the stampede for the door.

In effect, though, that’s exactly what many local media companies are telling themselves when they base their online strategy on “convergence sales,” “upsells,” “joint sales,” or “packages.” By whatever name, this strategy is, at best, transitional, and at worst, doomed.

Selling to your existing advertisers is a seductive strategy because it generates quick, high-margin sales. It makes sense to go after the proverbial low-hanging fruit, harvested from the folks you already know, who already trust you. Online revenue growth looks good, and the temptation is to stick with a proven formula – especially when times are getting tough for the core medium.

But as we explained in our 2002 report, “Disruptive Technology and Local Media,” it is essential for long-term growth that local media companies resist that temptation. They must force themselves to invest in the future of their online operations by going after new business – online-only business – before those easy sales have been exhausted.

The conclusions we reached in 2002 are still valid – and widely unheeded. The commitment shown by local media companies to extending their online businesses has been uneven. Some have actually taken a step backwards in the past couple of years by reigning in their fledgling online-only sales staffs and putting online sales back on the plates of the core medium’s salespeople.

We’re concerned about this tendency for two reasons. First, it sends the message that the online operation exists primarily to support the core medium, rather than to evolve into its own business. Second, it limits the site’s growth potential by neglecting new classes of customers in favor of “over-serving” existing customers. All of this is taking place in an environment of unfettered competition. You can bet that the entrepreneurs running the “pure-play” Internet firms active in your local market are looking for ways to serve anyone who might possibly be a prospect, not just people who happen to be advertising in the newspaper these days.
- Colby Atwood

By Gordon Borrell

I spoke at the National Association of Broadcasters small-market TV symposium in San Diego a few weeks ago, and despite the fact that I had to follow an animal act that included a 20-foot python, the speech seemed to go reasonably well.  That is, until I mentioned that convergence was an albatross.

In front of me were a few hundred broadcasters, most of whom had been laboring under the delusion that God created Web sites to help them sell more TV commercials.  All of a sudden their faces melded into an image of that 20-foot python, and  I was feeling a lot like a small toad.
 
Convergence is a poison pill for broadcasters and publishers alike.  It represents a glimmering dream for media executives who believe that their multimillion-dollar investment in printing presses, broadcast towers, talent and writers can yield even greater profits by merely sending the final product to another delivery channel and charging their advertisers more for it.
 
TV stations are hell-bent on selling convergence packages.  Online programming is the sizzle that helps sell more broadcast commercials. 
 
Newspapers are ecstatic about print-and-online packages – the famous “up-sell” that has driven billions in print advertising sales.
 
Radio stations are falling all over themselves with the idea of convergence, littering their sites with banner ads for every advertiser that buys a radio spot.
 
A DEATH KNELL

We heard the first faint tolls of the death knell for convergence this fall as media companies prepared their 2007 budgets. Managers of the most aggressive interactive units told us that they were adding online-only salespeople at a rapid clip because their “combo” sales were beginning to run negative. That is, online revenues driven by print or broadcast components were actually declining.  

Why?  Two reasons: They had reached a saturation point by up-selling all the traditional advertisers they could, and the online combos are declining as well because many advertisers are scaling back print or broadcast advertising.
 
In short, they realized they were drinking from a bucket with a large hole in it.
 
There’s a bigger problem with convergence.  It has the dual effect of raising an advertiser’s bill for a medium that’s already considered overpriced, while undervaluing what has become a very valuable medium – online.
 
Name me a single local media company – a TV or radio station, newspaper, magazine, yellow pages directory, or direct mail company – that is successful in using its existing sales force to sell another form of advertising. Know of any TV salespeople who also sell radio spots?  Newspaper reps who also sell direct mail?  Radio reps that sell cable spots?   I’m sure there are some who do a little cross-selling, but I’m equally sure that it’s “a little” in the strictest sense of the word.
 
DISRUPTIVE TECHNOLOGY

Four years ago I worked on an applied research project with Clark Gilbert from Harvard Business School.  We examined Harvard’s research into how incumbent businesses responded to a disruptive technology, then studied how five major media companies were responding to the Internet. 
 
We found the same pattern of behavior that has afflicted so many other industries – a focus on using existing staff to sell the new technology to current customers. It was only when the incumbent business hired a separate staff and located it elsewhere, away from the conflicting goals of the core business, that it was able to generate long-term growth in the new business. In every instance where an incumbent business tried to manage the new technology with a “converged” staff, it failed miserably.
 
History is against the idea of convergence ever being successful.  The largest and fastest-growing online companies today – Google, Yahoo, eBay, Amazon.com – have no ties with the traditional media they compete with.   If convergence were such an advantage, why aren't we going to Britannica.com to look things up or Barnesandnoble.com to buy books?  Despite that both those companies grasped the Web early, they spent far too much time strategizing how the Internet would serve their core business than they did merely pursuing the new opportunity.  For an example of how a traditional business can stifle growth quickly, just recall fast-growing AOL’s acquisition of Time Warner six years ago.
 
Selling online ads to current print or broadcast customers was a good first step for local media companies – picking the proverbial low-hanging fruit. But as a strategy, it’s a trap.
 
The lure of profits has cast a spell on many local media companies, transfixing them on high-margin up-sells making them reluctant to hire online-only salespeople. In the short run, it’s working: media companies are reporting profit margins from their Web operations that are north of 60 percent. 
 
For the long run, media companies should put their online profits toward finding new ways to serve the vast majority of advertisers who have never done business with the newspaper or the TV station.
 
It is the only way media online operations can keep growing as fast as the online ad market.