Tuesday, April 09, 2013

The Fate of the Perfect Business When the Impossible Happens

I had the pleasure of hearing marketing guru Seth Godin speak at a session of the C-Suite Media Group recently.  He discussed some interesting principles about why businesses fail, and what they - and we - need to think about to survive in the new economy.

He felt that we are all living through a revolution in business, which clients are certainly ignoring.  To describe the nature of change today, he introduced the concept of "Perfect and Impossible," using the example of the music industry.  

From this perspective, through the 1970s and even 1980s, the music industry was Perfect.  It was an oligopoly, with only a few, very large major players.  It generated record (no pun intended) profits - after all, the LPs, cassettes and CDs had to be replaced if they were given to a friend or worn out from usage.  The government even provided the electromagnetic spectrum over which radio stations would play and promote music.  There were no significant threats on the horizon.

Then all of a sudden, a few short years ago, something impossible happened, and music industry as we all knew it is dead, due in large part to digital media.

Of course, while the revolution started in media, it is spreading to everything else - even eyeglasses - by creating consumer alternatives that previously were impossible.  

How are legacy players responding?  Seth brought out another metaphor: they are defending the castle, but the superhighway bypasses the castle.  In other words, their first response is to work harder at their original tasks, but that doesn't solve the problem.  What does?

Seth cited Adam Smith: scarcity creates value.  In the case of ad-supported media, there is no longer any scarcity:

  • number of ads viewed approaches infinity
  • total ad spending flat, crushing unit prices
  • media players can no longer hold their audiences hostage
  • the cost of media delivery is approaching zero
First of all, Seth indicated that a complete change in mindset is necessary.  The basic principle is that capitalism consists of taking financial risk.  The large industrialist economic players, however, do not take risks, e.g., Coke does not take risks.

The problem is that, as the economy developed, industries shifted from being capitalists to being industrialists - the emphasis was on being smooth and polished instead of being risk-takers.

In today's economy, companies have a choice - engage in a race to the bottom or to the top.  The top  will consist of a category of one.  In a race to the bottom , the winner is the cheapest provider.  In that case, the winner could actually be the loser - the risk could be that you win!

By contrast, a fashion-related business is a race to the top and to be the sole winner, presumably with premium margins as well.  For example, Seth views Apple competing by using the fashion model.

Seth's recommendation to the room, therefore, was: Stop waiting to be selected for an established job, stop looking for an industrialized role in today's economy.  The alternative: pick yourself, just as a fashion brand establishes itself.

He sees that true value is in The Connection Economy because connections are scarce.  Value is therefore established by the number of people who 
listen to you and how many would miss you if you were gone.

Not surprisingly, Seth feels that big brands are blowing the opportunity to create real connections, but that it will take time and effort.  If they don't have time to do it right, then they don't have time to do it over.

While industrialists own assets and want to defend them (see: Castle, above), the artists of the new economy ask what is the next interesting project.  There is a land grab aspect to his because it is important to select a niche - as he said, it would be hard to be the next Seth Godin, and it probably best to look for the next category instead.  For example, he does not use use Twitter, and someone else - Chris Brogan - took it instead.

Fortunately, Seth feels that there are lots of niches that need to be filled.  Hopefully, that means that there are plenty of opportunities for those willing to take on the challenges of the new economy.

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