Media strategy for the oldest media companies

When we think of a media strategy, we usually think of non-media companies trying their hand at media or traditional networks and cable companies adapting to a streaming mobile era. Worldwide, the largest segment of media companies is traditional state-owned broadcasters, SOEs, whom collectively serve consumers across virtually every timezone. They also need a media strategy and face problems that are significantly different from that typically discussed.

Summary: State broadcasters need a new media strategy. The age of homogenous state broadcasters living off a guaranteed television license is not only over, but the license itself has stymied productivity, innovation, and creativity. A media strategy of locking in a market with legislation versus competitive products no longer works. Funding that media model with mandatory TV license fees is failing.

A new media strategy emerges

The seventeenth was a day citizens of the Middle East will remember for a long time. At the start of one of the most watched television events of the year, one TV station redefined broadcast journalism and turned the tables on its peers. Within minutes of the first signs of trouble, the camera crews stepped in and began unprecedented blanket coverage of the unfolding events.

From the first conflict all the way to the fireworks display of coalition aircraft bombing military infrastructure, reporters and camera crews reported from the frontlines. While some stations scrambled to match the 24-hour footage, on-the-ground reporting and expanding coverage, many of the established networks knew they were beaten.

Rivals bitterly complained that the maverick billionaire founder did not deserve such success as his gamble to redefine broadcast journalism increasingly looked like it was paying off.

The station, its copyright-free clips, and brand of reporting became overnight sensations. The results were surprising given the tiny size of the station and its fledgling presence at the time. Many questioned how it could have usurped more entrenched stations.

In part, while cash-strapped competitors were resorting to in-studio expert debates, the station opted for deploying crews with expensive telecommunications equipment to report from the field: a dangerous and costly strategy as they were harassed, detained, injured and had their equipment smashed.

As tensions continued to escalate in the Middle East and allied demands were ignored, the world watched one of the greatest aerial assaults ever seen over a desert country.

The war inevitably provided an opening for a network bold enough to take the risks, and patient enough to lay the groundwork, to exploit the unfolding events. Over the decade preceding the conflict, this station had patiently built its capacity to report on pivotal events, established a reputation of integrity and developed an effective broadcasting platform.

By the time the dust had, literally, started to settle on the conflict, the networks collectively realized their stranglehold on global news coverage was over.

Which network rolled out this media strategy?

You would be forgiven for thinking this is the story about CNN turning the tables on Fox, ABC, NBC, and CBS during the first Gulf War. That event was widely considered to be the turning point for CNN

This piece is about Al Jazeera. The similarities are uncanny.

That war, the first Gulf War, began on 17 January 1991. The Tunisian event which triggered the 2010/2011 Middle East uprisings occurred on 17 December 2010. Al Jazeera replicated the strategy adopted by CNN in 1991; it simply outdid the networks at their own game.

Back in 1991, upping the ante by CNN meant 24-hour live reporting – the so-called “CNN-effect.” In 2010/2011 Al Jazeera beat its competitors through the quality of its reporting locations, ability to access trouble spots and willingness to report controversial stories.

Both networks were started by billionaire founders, Ted Turner and the Emir of Qatar, Sheikh Hamad bin Khalifa. The similarities end there.

Al Jazeera is a state-owned broadcaster. By conventional expectations, it should be unsuccessful. State broadcasters are not typically associated with an effective media strategy. With the noted exception of the BBC, it is widely expected that only the established private stations like Fox, ABC, and CNN should dominate news broadcasting.

Al Jazeera’s rise is even more striking since state-owned broadcasters worldwide, including the BBC, are reeling from diminished profits and declining relevancy as their home markets open up to well-funded competition. A situation they are not equipped to handle since their business models have remained virtually unchanged for close to 80 years.

While state-owned broadcasters have tepidly exploited the internet, social media and mobile phones, they have remained anchored to a television license fee model whereby they own the medium of content delivery. A media strategy of control.

Most state broadcasters initially started as radio stations before adding in television services and then splitting the service into two focused businesses. Even the most famous of them, the BBC, has been struggling to find an effective business model and has announced at least four major strategy shifts in the last 12 years.

Exhibit 1

Media strategy map.jpg

The latest involved a significant reduction of foreign reporting, the division which made the BBC a worldwide brand. In analyzing 98 state broadcasters worldwide to understand the nature of sector disruptions occurring, six overriding trends were noticed.

Sector fragmentation negates the old media strategy

State broadcasters were initially incorporated as vertically integrated companies. In the early days of broadcasting, they were usually responsible for working across the value chain and across customer segments. The station would design sets, build network assets, write scripts, contract actors, produce news, broadcast sports, documentaries, sitcoms, commercials and more.

Moreover, it would do so for both radio and television, and cater to all population segments. The is an exceptionally complex operation, and complexity reduces productivity and increases costs.

Many still operate this way, even while services, products and customer segments traditionally targeted by state broadcasters are splintering and fragmenting. As incomes have risen consumers are more willing to pay for higher quality content. This has encouraged private sector players to compete for their disposable income.

When a private company enters a market it means the market is profitable.

There is a choice in the market for consumers. The state broadcaster is typically competing against these nimble and focused competitors using an asset base and funding strategy designed for a competitive era void of choice and consumer leverage.

Exhibit 2

Profitability of state broadcasters.jpg

In essence, state broadcasters are fighting on too many fronts against too many specialized competitors, while funding the out-dated business model with per capita revenue which has declined in real terms.

Fragmentation of a sector is a natural process in business. All sectors go through this, from the IT to automotive sectors. For example, in its early days, Ford produced the majority of supplies for their cars.

They owned forests supplying their wood panels and farms supplying their wool. As competition intensified and incomes rose, specialist providers stepped in to take over large segments of the value chain. Ford, like so many other automotive companies, needed to redefine its core business. In the end, everyone benefited.

Ford could focus on designing and building cars, while specialists could focus on distinctive parts of the value chain. This focus ultimately led to innovation, cheaper products, and happier customers. Everyone benefits from this eco-system of interrelated suppliers and buyers.

Most state broadcasters have not developed a media strategy to find their role in the fragmenting sector.

A media strategy based on a moat-protected market no longer applies

Barriers to entry have declined substantially. In the 1980s and 1990s, state broadcasters were only competing with nascent domestic competitors and international broadcasters like BBC and CNN. The latter provided marginal competition at best since they primarily focused on global news.

By 2010, the rise of the internet, advanced mobile phones, video-on-demand, and tablet computers had redefined in-house entertainment. These devices had taken entertainment to a place the state broadcasters did not fully understand – the ability to bypass the television set and reach consumers directly.

This came as a shock to many state broadcasters since their entire business model rested on control of the one distribution channel consumers relied on for all their electronic entertainment needs – the television.

Compounding this problem was the rise of high quality and varied domestic competitors. By focusing on more and more tightly-defined niches, these competitors were able to learn how to produce highly relevant content cheaply and profitably. One small customer segment migrating to these specialist producers was not a problem. However, collectively, as more and more niches began migrating, advertisers noticed and revenue started dropping for state broadcasters.

Remember America’s Funniest Home Videos?

This hit by ABC was one of the most purchased shows by state broadcasters worldwide. Local versions of the show in South Africa, Russia, Poland, Thailand, Chile, and Brazil were a boon for networks as the shows guaranteed viewership and advertising dollars.

At one time it was rated one of the top shows in the USA.

Then YouTube arrived. It was a 24-hour, on-demand channel with little filtering of content and everyone was guaranteed an audience. Viewers around the world deserted variants of the show by taking their footage directly to the internet. YouTube killed shows dedicated to consumer-generated humor clips.

Today, America’s Funniest Home Videos does not feature in any rankings although it is still produced.

State broadcasters typically responded to these trends by picking areas of the value chain they would dominate. TV production, casting, script writing, props, and syndication were exited. Many believed that with guaranteed television license fees or government subsidies, they would still survive. This did not happen. Consumers continued to spend their income on other sources of entertainment.

Can a media strategy of sophisticated niche programming funded by a static revenue base succeed?

In the age of YouTube, Vimeo, Instagram, Facebook, Snapchat, internet radio, podcasts, and more, the cost of switching from state broadcasters is virtually zero. Consumers can, at the click of a button, find high quality and relevant information. By trying to be everything to everyone, state broadcasters have failed.

Gone are the days when consumers were happy just to have access.

They now want high-quality content that is more tailored to their specific needs, rather than having to feel like they are watching that which is tailored towards the lowest common denominator. A limited revenue base spread over increasing customer segments, sports genres and TV programming ultimately lead to poor quality production.

Moreover, buying the rights to shows guaranteed to garner eyeballs, like the Olympics, can be ruinous to a state broadcaster.

The cost to remain relevant is prohibitive.

In the 1970s, a state broadcaster would be able to cover global events through a correspondent in Washington, New York, London and France. The world was a lot smaller and “defining” moments were not likely to happen in the emerging markets as these economies were still too small to warrant much attention.

Fast forward 40 years; historically defining moments happen almost weekly and with no warning. State broadcasters have all but given up the race to have correspondents on location in key regions or attempting to fly in reporters. There are just too many events that are deemed newsworthy today and trying to cover them all is far too costly.

This has created an opening for global news stations like Russia Today and Al Jazeera, state broadcasters who have focused on global news from a regional perspective, to prosper.

A media strategy of preserving culture to projecting influence.

With the exception of the BBC, which projected influence by following British commercial interests worldwide, Russia Today and Al Jazeera are strategic bets by their respective governments that the role of the state broadcaster has changed. Rather than simply filling a void in the domestic market or preserving local culture, they realized that increasingly aware citizens around the world needed the global perspective their own state broadcasters were unable to provide.

Exhibit 3

Language impact on a media strategy.jpg

Both Al Jazeera and Russia Today provide news from a Middle Eastern and Russian perspective, respectively. Both have posted impressive growth rates in their home regions and abroad, and this success has allowed them to expand their formats, topics, bureau offices and, ultimately, their influence. That Al Jazeera has chosen to specialize as a global news network in the vein of CNN does not mean all state broadcasters should do so.

It just means the old model of state broadcasting is not the only model.

State broadcasters across the world are struggling.

In analyzing the data from 98 state broadcasters, we find that there are no significant differences in performance across continents. We also find very similar revenue generating strategies, a type of television access license or state subsidy in all but one case, and mainly a domestic focus across all customer segments.

The financial woe of state broadcasters is not due to a lack of revenue.

The dilemma is that broadcasters need to perfectly balance their costs and revenues since cost overruns cannot be recovered through higher fees. Even if they produce a major hit show, they rarely can charge extra fees.

Perversely, the television license fee which was designed to protect state broadcasters from losses has now resulted in them being unwilling to commit capital, talent and time to produce high-quality entertainment since the return is fixed.

Without this incentive, quality has dropped to the point that consumers are complaining about the need for such high fees. As discussions proliferate about reducing the scope of state broadcasters, the question turns to what return should they earn on their new mandate and what is the appropriate cost structure. This has led to difficult conversations as benchmarks invariably outline numerous opportunities to reduce costs.

Like the golden era of mobile phones, there was a time when owning access to the distribution channel, television sets, was the key profit driver. However, as content increasingly migrates onto alternate channels, state broadcasters will find that many will choose not to buy television sets, thereby lowering revenues.

New sales of televisions sets actually declined between in the USA. It is worse in most emerging markets. As this trend may well continue, it raises the question of the role of the state broadcasters. They can become lucrative content producers and distributors or fight a losing battle to reverse their loss of channel control.

Trends cause shifts in market dynamics which can be exploited by state broadcasters. However, before rethinking strategies, the government needs to rethink their funding model.

Drop the large and long-term hedge to develop a new media strategy

The majority of state broadcasters are funded by a form of mandatory television ownership license, annual increases of which barely matches inflation. It is appropriate to think of license fees as one gigantic long-term revenue hedge. Initially, the hedge protected the broadcaster from possible dips in revenue should consumers not be willing or be unable to pay for the privilege of broadcast television.

When disposable income levels were lower, the state broadcasters needed this fixed revenue base to remain financially viable. Over the years, the two criteria which validated this hedge disappeared.

First, consumer income levels rose and consumer needs fragmented. This resulted in consumers demanding specialized content with their ability to pay for this content.

Second, to meet this demand, which the state broadcasters could not, private companies entered the sector. As viewership shifted, viewers of the broadcaster’s content declined, as did advertising revenue.

Like most hedges, this one protected the state broadcaster from only one side of an extreme drop in revenue. It did not allow the broadcaster to benefit from increases in revenue.

The hedge has to be removed. It has led to unusual but expected behavior from many state broadcasters. Unable to fully benefit from the returns of innovative or pioneering programming, broadcasters have resorted to producing content which is guaranteed to maintain their cost base.

This has stifled the growth of the broadcaster.

New strategy = new shareholder expectations.

It is not unusual for state broadcasters to produce content in over ten different languages, across all segment types, and for all consumer groups. This model and its associated asset needs are also replicated for radio content.

A state broadcaster cannot be everything to everyone.

Fundamentally, it does not need to be. The private sector has proven to be more than innovative and willing to capture opportunities which the state broadcaster views as gaps. The first step for a broadcaster is to redefine its mandate and gain agreement on this from the government.

A new media strategy

Once this is done, the broadcaster can exit selected categories and genres of production. It may also outsource large segments of the value chain.

Two crucial decisions will need to be made: the revenue generating model and the channel strategy.

Both are linked. If the broadcaster exits the licensing model and effectively relinquishes control of a declining distribution channel, should it not become a content business to feed other platforms? State broadcasters can never again hope to dominate a distribution channel, like televisions, as they once did.

Mobile phones, the internet and tablet computers are all distributed independently of state broadcasters. Within these channels, micro-channels like Twitter, YouTube and Facebook also cannot be controlled. The broadcaster needs to create compelling content to survive, but for sufficiently large markets.

If locked in with license fees, there is no path for a state broadcaster to grow unless the domestic markets are expanding rapidly. Superior ideas are not rewarded with extra revenue and this creates a cascading effect with lower advertising revenue.

This problem compounds itself when a niche language or culture is covered. The content will have no export market thereby limiting any revenue from this avenue.

In fact, the smaller or more specialized the domestic market, the greater the need to remove license fees once the market has matured and possesses sufficient disposable income.

Exhibit 4

Subsciber base value versus fragmentation.jpg

As demonstrated by Al Jazeera, state broadcasters can reinvent themselves to be innovative, effective and influential. This requires taking bold steps and rethinking traditional business models. The license fee model, once considered a revenue hedge, may now be on the wrong side of economics. Carefully deconstructing this hedge can catalyze innovation and lead to satisfied consumers.

Resources for subscribers

Our subscriber content sites behind a paywall, StrategyTV.com. For subscribers reading this article, the following links will help you improve your understanding and practice of the concepts above.

SOEs clearly have many stakeholders with daunting challenges. They have to meet government, regulator, market and customer needs. Many sectors like pharmaceuticals, healthcare, financial services face similar environments. When faced with a situation where there are so many problems that it is hard to prioritize, the first step is to identify the red-issue to the CEO.

Every move a CEO makes is judged by the market in long-term financial measures so a clear business case will be required. Remember, no matter what issue you are solving, the overall problem-solving approach is approximately the same. The steps will look the same, but the content is considerably different, leading to bespoke solutions.

The slides above are always built as part of a storyboard. This checklist will help you.

For loyalty members, Insiders, you will find more advanced content on StrategyTraining.com showing you how we applied the concept.

1

The technique we used in this article is easy to learn and use.

We identified the main approach used to fund state broadcasters, TV license revenue. (Conventional wisdom says…)

We determine under which conditions this approach worked. (When does conventional wisdom work…)

We tested to see if those conditions applied to most state broadcasters. (Conventional wisdom does not all…)

Where it did not apply, we looked at what a broadcaster should do to become successful versus blindly following conventional wisdom.

We teach this entire approach in what is probably our most popular strategy training program.

2

Leading a turnaround of such a complex business is difficult. If you want to learn more about developing a corporate strategy and transformation program for such a large business, watch The Corporate Strategy & Transformation Program. This tracks the turnaround of a large state-owned power company.

3

Corporate strategy is always about finding a market to serve. That must be a conscious choice of management. Within that market a company needs to pick the part of the value chain it will serve and develop a business model to make money. You need to be aware of the following.

Corporate strategy is different from other types of strategy.

The objective-function approach does not work in corporate strategy.

Corporate strategy is different from a transformation program.

Corporate strategy tends to follow a workshop driven process.