This article first appeared in The Edge Malaysia Weekly on December 11, 2017 - December 17, 2017

The last two weeks, I wrote about how the global technology giants have ­decimated the newspaper industry. Here’s a quick recap to refresh the memory.

Newspapers had responded positively to and embraced technological innovations in working with the industry’s giants such as Facebook and Alphabet, which owns Google. Many put their content online to win over the audience and to gain a fair share of digital advertisements that were ripping apart the traditional print advertisements of these newspapers.

But the results were not to be. The fact is that news publishers made little headway in securing digital advertisements, and even from a low base, annual growth has stagnated. Meanwhile, print advertisements continue to be disrupted, falling at a faster and faster rate each year. Worse, newer technologies are designed to further annihilate the industry by blocking digital advertisements on their websites.

On the other hand, these digital technology giants are growing their own digital revenues at a breakneck speed. Even from a high base. Facebook is growing its revenue at 57% a year from a US$20 billion base and Google at 18% a year from a US$70 billion base. In comparison, total digital advertisement revenue for all the news publishers in the world is less than US$10 billion and already, growth has slowed to 5% annually, and is falling.

As promised, this week, I will focus on the lessons we can learn. This is because what happened to the newspapers is likely to happen to many others. As I stated at the beginning of the first article in this series, I chose newspapers because they were one of the first industries to face digital disruption and, consequently, we have more evidence on outcomes to evaluate.

For the record, I am not anti-innovation. The fact is I started internet banking and internet stock trading in 1994 (PalDirect under PhileoAllied Bank) and e-commerce and ­e-payments in 1997 (PalWorld) long before there was Amazon.com or Alibaba Group Holding. The promise of the internet is nothing new.

These technology giants are successful because they contribute positively to the people they serve. They are customer-centric. They have delivered greater conveniences at lower prices and with more varieties. They have matched buyers and sellers more efficiently with minimum transactional friction. Their innovations have encouraged even more innovations. The shared economy improved asset utilisation. Crowdsourcing and social media have further democratised the information ecosystem and given an equal voice to everyone. They have promoted freedom, liberty and justice. The point I am making is that we must celebrate the digital revolution.

That said, I believe there is a risk that these global technology giants may become the new colonisers of the business world. The structure of the industry will result in the creation of monopolies, of more mergers and acquisitions and of one dominant player in each market segment. And even here, the lines have blurred as to what it means by market segments, as many platforms now traverse traditional industrial categorisation.  

Are there no limits to the reach of these global digital platforms? They risk regulatory interventions, such as the antitrust law, and  new innovations that will evolve from the current digital technologies.

And there is precedence. The telephone industry grew on the strength of the network effect. The industry’s domination resulted in the dismantling of the Bell System by AT&T Corp in 1984. The technology of the fixed line used by the industry in turn was disrupted by mobile technology. Finally, telephone companies have now evolved to become data providers.

Who are these global technology giants or platform enterprises or ecosystems? Broadly, they are divided into three categories — transactional, innovation and integrated. Platforms that facilitate transactions are Tencent Holdings, Baidu, eBay, Netflix, PayPal, Airbnb, Uber and Grab. Innovation platforms allow others to develop a large number of complementary innovations. They include Apple, Microsoft, Oracle, Intel and SAP. Then, we have the almighty integrated platforms that combine both transactions and innovations. These are names we are all familiar with:

Apple, Google, Amazon, Alibaba and Facebook.

What are their characteristics? They leverage the network effect, where more users make the platform even more attractive for potential new users, reinforcing growth at a rapid pace. They are able to capture, transmit and monetise data, taking advantage of the digital technologies and the pervasiveness of the internet. Value is created by matching buyers to sellers, whether it is between individuals or between individuals and firms.

Successful matching of buyers and sellers at minimal frictional costs requires scale, and the convincing of manufacturers and suppliers (whether it is banking or baking products, food retailing or high-street fashion, knowledge content or endless gossip) to be part of their ecosystems. Operating as a single gateway delivers the value proposition of many businesses, thereby increasing convenience, reducing costs and enhancing experiences.  

They are generally agnostic and participants are sold on business models that allow everyone to win. They are asset-light, leveraging the investments made by others in their ecosystem to supply the goods and services.

A key reason for the success of these platform operators is that they are absolutely customer-centric. Capturing and understanding and using the data to better serve their users, they leverage cutting-edge IT systems, machine learning and artificial intelligence.

These characteristics help us understand why and how these platforms or technology giants work. And perhaps provide some answers as to how businesses should tailor their digitalisation strategies.

Let me focus just on four of these characteristics and try to analyse the implications: competitive pricing, minimal frictional costs for efficient matching, ownership of data and win-win business models.

Efficient matching requires these platforms to own the data: the customers, the transactions, their preferences, habits and so on. Owning the customers means others — manufacturers and suppliers in the ecosystem — are just “spokes in the wheel”.

Frictional costs are best reduced by means of commoditising the products and services offered on their platforms, which eliminates branding preferences.

Competitive pricing must be at the expense of the manufacturers and suppliers. The core competencies of the platform enterprises are in matching buyers and sellers, leveraging others to produce. And since these platforms own the customers and goods are commoditised, manufacturers will have to accept lower and lower prices to sell. While revenue may rise with higher sales from a larger market audience, margins will fall. The net effect over time would be fewer but larger manufacturers. And even then, more likely than not, returns on capital would not be anything beyond equivalent market returns.

Which leads us to the win-win business models. While these platforms may need to encourage manufacturers to be part of the ecosystem in the beginning, to leverage the network effect, they soon become the indispensable ecosystem for manufacturers that go online without a proper “platform strategy”. Without ownership and understanding of their customers, reliant on the platform for sales, with no brand differentiation, it is clear where the balance of power in this relationship ends up.

Let me now return to the agonies of the news publishers. It is near impossible for them to create their own platforms. They are not agnostic, are highly capitalised with low returns and have a single product gateway. It is difficult to imagine them catching up with Google and Facebook in terms of scale of audience or their superiority in advertising segmentation and targeting technology.

Supplying content through the platforms increases audience, but the payback is too low to fund operations. Facebook pays out only 7% of its digital business revenue to news publishers for their content.

Arguably, the content supplied by news publishers to Facebook may have weakened the industry instead, by helping Facebook to build up its user base. In other words, while they embraced these innovations to better enable their businesses, it may well have also put them in their current predicament.

Is there an appropriate digitalisation or platform strategy for news publishers? How do we overcome this “do, you starve, don’t, you die” option?

For news publishers, as for all other businesses, surely the key to survival rests with your value proposition. What do you sell that is of value and unique? Content, content, content. Technology is only the enabler. Too often, people are distracted by technology.

And if your content is valuable, unique and generated at high costs, surely you do not give it away for free. You want to use the internet and the digital platforms that offer ­unparalleled reach and the digital technologies that improve your engagement with your readers, in ways not possible previously.

On the other hand, giving away poor content to get an audience paid for by advertisers will surely fail in a world with too much information, where we can customise what we want and when we want it.

Globally, circulation revenue has overtaken advertisement revenue, one rising while the other continues to fall (see chart). This offers a ray of hope.

To write off print is too premature. It will evolve. A case in point is The Edge Malaysia. We have grown not just the paid subscribers for digital-only but also the paid print copies. In the process, we have increased our advertisement revenue.

Media 3.0 must extend beyond growing digital and print subscriptions. News publishers must win back advertisers too and be customer-centric. They must invest into and pursue longer-term strategies. Audience engagement must be multi-dimensional, across all platforms and formats, with content seamlessly integrated.

At The Edge, we have ventured into an investment platform (AbsolutelyStocks) and a property platform (EdgeProp) that cater to the needs of our readers, increase curiosity and generate leads and data to strengthen our audience engagement.

One final point. Consultants will tell you that you retain a key strength versus these platform operators — that of trust in your brand. Banks and insurance companies are told that they are near the top of the most trusted list, more than social media, telcos, technology firms and so on. Newspapers are told that because of the rise in fake news, readers will revert to credible news. And physical stores provide transparency of product quality and better servicing.

Except for a few that truly have a strong brand proposition, this is probably an illusion for most others. The internet has not only changed behaviours but also beliefs and values. There is a lot less trust in establishments. Recent surveys showed that trust in newspapers fell even more than in social media, despite the rise in fake news.

My purpose in writing this series was to articulate questions and highlight areas I found interesting and needed debate. I think, too often, we forget that our businesses are about our core competencies and the unique products and services we offer as our value proposition. We must embrace new innovations to better enable our business, but on our terms and in ways that innovation does not become a “Trojan horse”. Given that these ­giant digital platforms are encroaching into every aspect of our life, we need to understand their strengths and characteristics, even as we remain engaged.

The critical difference between the successful technology companies and the traditional ones is not technology but mindset — the value and culture of their people. For tech companies, their employees are interested in the goals and objectives 10 years from now and the value of their share options. For traditional companies, the executives focus on meeting this quarter’s and this year’s key performance indicators, their bonuses for the year, the size of their offices and their car entitlements.

These digital companies are also leveraging regulatory and financial arbitrages to their advantage. I will explain this in future when time permits.

Total portfolio return now stands at 67.7% since inception. This portfolio continues to outperform the benchmark index, FBM KLCI, which was down 6% over the same period, by a long way.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.