Tuesday, May 05, 2009

No. 7. Chaos ensues

I was pondering the news that more newspapers are in trouble, laying off employees, or forcing furloughs. Local TV stations seem close behind. I realized we may be at a new stage in the disruption cycle. We moved from stage 6 to stage 7, possibly stage 8 in the local media industry, according to Andy Kessler's scale.

I am speaking of a venture capitalist Andy Kessler's description of how disruptive technology and organizations force incumbents to change. Michael Lewis memorialized Kessler's thesis in his book "Next." I keep a copy of Kessler's thesis on the wall of my office because it is amusing and truthful.

From Page 160, Kessler's thesis reads:
1. Rules are established to create order and maintain profits for incumbents. Examples of rules are: social mores, professional licenses, government regulation, locked-up distribution channels.
2. Cheaper technology suddenly allows for the bypassing of the rules.
3. Incumbents are fat and dumb and happy with current monopolistic profits and their general situation, so they bad-mouth any new stuff which threatens their incumbency or profits, or both.
4. Fringe players emerge to use this ever cheaper technology to simply ignore the rules.
5. Fringe companies attract venture capital since there are great profits to be made by underselling the incumbents.
6. Incumbents are in denial until their profits are really threatened and/or market share begins to erode meaningfully.
7. Chaos ensues; fringe players are threatened with lawsuits, government regulation, public shaming, etc.
8. Growth at the fringe accelerates, as it is the right way to do business using new technology.
9. Incumbents co-opt the fringe, or fringe players become the new incumbents and seek to establish new rules.
10. Go to 1.

Part of the joy of this thesis is the obvious irreverent tone. I typically find myself laughing when I read it.

Typically, when you talk to passionate and "extreme" Internet professionals, they predict the demise of old media. They tell the neophytes and curmudgeons that the Internet will kill Newspaper and TV. Some rally behind the declarations and others become indignant. For years, I felt there was truth in this, but that the argument was overstated. I tried to soften my line realizing that TV and newspapers won't go away completely, but change. Lewis speaks to this as well in his book.

He writes, the "Internet's gift to the fringe was to expose a lot of commercial and social rules as dated an inefficient...The relentless pressure from the fringe did not mean that the center would collapse. But to survive it would be forced to remake itself."

I thought newspapers and TV stations were transforming, already feeling the pain. We all know margins have been increasingly squeezed for the past 5-10 years. But, with the credit crisis the disruption and transformation accelerated. Then came the news of layoffs and shut-downs. Now, there is news of newspapers "re-opening " as Web-only shops, and news of journalist 'on the beach' starting their own Web sites. I interpret this as stage 7 in Andy's timeline, though it is probably impossible to pinpoint a single stage.

Why does this matter? I previously thought we were all the way through the cycle. As it turns out, I had no idea what the acceleration of deterioration of traditional media would look like. To be frank, it is more severe than I imagined and approaching what some of those "extreme" Internet professionals argued. That is a revelation for me. I still don't see "TV" or newspapers going away, but now see a much more swift and violent transformation. Even if the economy improves, things have changed forever in journalism and media.