B-to-b growth: Chasing the inflection point

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Ten years ago I worked in the music business just as the Internet began its disruptive influence. Music executives at the time made soothing statements at industry conferences that "there will always be retail stores for music." Unfortunately, the issue was not whether there would always be a music business; instead the issue was what would happen to investor returns as music shifted from retail to digital channels. The confidence music moguls had in 1996 had weakened by 1998 and, of course, the rest is history. The music industry plunged into sluggish CD format growth, widespread Napster-fueled piracy, increasing artist costs, expensive marketing, fragmented channels and customers with attention deficit disorder. By 2000, the music industry had been left for dead. Today, satellite radio, iPods, growing legal avenues for downloads and Web-based communities are driving music growth again.

The lesson is instructive for the b-to-b industry. For thousands of years paper has enjoyed a technological advantage for disseminating information (and this has been doubly so since the advent of movable type). Today, we in the b-to-b media industry might comfort ourselves with the notion that "there will always be magazines and newspapers."

Unfortunately, like the music industry, that is not something from which to take comfort. The issue is not whether there will always be magazines and newspapers; instead the issue is what will happen to investor returns as b-to-b companies shift from paper to electronic channels. In a world where investors (private and public) require ever-increasing returns, how can b-to-b companies develop and sustain growth during a major transition?

The challenge of turning a paper-based b-to-b portfolio into an electronic one can be daunting, as the math illustrates. If, for example, your print revenue is down 1% and your electronic revenue is growing with the market (30% to 40%) but your print revenue is 99% of your portfolio, your growth will be negative. More likely, the print revenue in your portfolio is falling faster than 1% (perhaps 2% to 4%, or even more). In this case, driving up the percentage of your revenue as rapidly as possible is a matter of urgency.

When the total dollars growing from electronic revenue exceed the total dollars being lost from declines in print revenue, you have reached and passed what I call the "inflection point." Short of the inflection point, the Internet's arrival (along with Google and all else) brings a fair bit of misery to b-to-b investors.

On the other side of the inflection point, however, is a future of growth and riches for a b-to-b portfolio. Accelerating electronic revenue swamps declining print revenue. Margins rise because profit contributions from electronic revenue are immune to the dizzying cost increases of paper and postage. Finally, your online users help you save costs by contributing content to your Web sites, and your sites link to and aggregate other's content-also for free.

As a result, each magazine franchise, as well as each portfolio of such franchises, should have a plan to develop its electronic revenue streams, as well as a three-year forecast of its print and electronic development. The publisher and "e" team need to understand what will happen to their overall revenue and their profits over the period up to and beyond the inflection point and, recognizing that, be prepared to invest to drive electronic revenue. Investors must understand the same issues and support investment or be prepared to exit the business.

What are the keys to successfully passing the inflection point in b-to-b? They have been extensively detailed in other articles, but they include creating an organization that innovates quickly; encouraging editors to remake themselves as fierce advocates for users rather than fierce advocates for their brands; flexibly adapting to new technologies; embracing online customers and letting them participate; managing print market share and page rates responsibly so as to protect the print from collapse; driving online revenue (either bundled with or separated from print); and, finally, having patience and deep pockets for the tough days.

Speaking of tough days, the music business has had a lot of them over the past decade. We can learn from its mistakes and speed up the migration to ensure b-to-b sings a happier tune.

Tad Smith is chief executive officer of Reed Business Information. He can be reached at [email protected]

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