60-The Two Best Consultants in the World Warn the Associated Press

Most industries evolve over time. The industry may start with many competitors. With the passage of time, usually 4 competitors will, through more attractive products and competitive acquisitions, gain 65% to 85% of the total market. Here we have an industry that has devolved. It started with a dominant competitor operating a near monopoly. The advent of the Internet created new competitors offering products at several different price points in competition with the leader. The formerly dominant leader still leads its industry, but its hold is much more tenuous than it was several years ago.

Posted 11/13/08

The Associated Press is a cooperative. This “non-profit” is owned by 1,500 newspapers. It employs its 3,000 journalists in 97 countries to provide news stories to these newspapers, as well as others in the media, including radio and T.V. stations and web sites. This company has been getting some significant warnings lately about its cost structure.

Many of its customers are struggling in the new media world. Newspapers and radio stations, especially, are suffering from the onslaught of web-based advertising. The first warning has come from its customers, one of the two best consultants. (See “The Two Best Consultants in the World” in the Perspectives on StrategyStreet.com.) More than 100 newspapers have announced plans to cancel their Associated Press subscriptions. By defecting, these 100 customers have told the Associated Press that its value proposition is out of line. The company is asking too high a price for its performance. In response, the company has cut some of its rates.

It has gotten equally ominous warnings from the second of the two best consultants in the world, competition. New competitors are entering underneath its current price umbrella. These new competitors offer competing services at lower prices. (See “New entrants are penetrating the distribution channels of the industry’s leading competitors” in Symptoms and Implications on StategyStreet.com.) CNN has announced that it is starting a wire news service. PA SportsTicker offers stock tables and sports scores at very low prices. GlobalPost is creating a network of international news correspondents with a planned launch in 2009. Several of Ohio’s largest newspapers have formed an organization to pool in-state reporting. All of these entities must have a low cost structure in order to survive under the discounts they must to offer in the marketplace to pull customers away from the Associated Press. (See “Substitute products have grown in importance” in Symptoms and Implications on StrategyStreet.com.)

The Associated Press has to listen to both of these sources of warning. They are telling the company that the cost structure and prices it enjoys today are not sustainable in the current competitive world. The company must examine its cost structure soon to ensure that it is able to create economies of scale to use against these low-end new entrants. Then it needs to re-segment its market to be sure that the benefits it offers each segment are more than worth the price it charges the segment. Finally, it needs to restructure its pricing system so that each customer segment gets good value; that is, performance for price.

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Update 2022:

After 2008, the AP began to have profit problems.  By 2010 earnings had fallen 65% from those of 2008.  In 2011 revenue was declining.  That year the company rolled out price cuts designed to help newspapers and broadcasters cope with the declining revenue.  Income remained low in 2016.

By 2016, the Associated Press news stories were published and republished by 1300 member newspapers and broadcasters, down from the 1500 members in 2008.

The industry’s Very Large and Large customers are critical to the success of AP. These are also the customers competition will seek to pick off as they enter the market. See HERE and HERE for a way to define these relationships.

The AP suffered from the onslaught of low-end competition, both Next Leaders and Price Leaders. They can be very tough competitors. HERE are some ways to deal with them.

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Update 1/26

The Associated Press has gradually weakened under the stress of a thousand cuts as its industry has devolved. 20 years ago, the AP dominated its industry by offering its monolithic products to newspapers, broadcasters, digital publishers and other firms needing real-time verified news. The AP relied on three unique sources of strength: a cooperative funding model, a near monopoly on state, national and international coverage and high switching costs. All of these sources have dissolved as competition has created a plethora of new businesses to take away some of AP’s customers, both directly and indirectly.

The cooperative funding model could not withstand the growth of the Internet. Most co-op funding models force Small and Medium customers to subsidize the industry’s Large and Very Large customers. As the Internet and new competition took hold, AP had to revise its pricing to respond to the intense financial pressure their Small and Medium customers felt. AP developed new pricing models that offered modular packages of services and customizable products. These changes reduced revenues and effective margins and caused AP to reduce some of its staffing and product coverage, further weakening the AP.

An easy way to think about AP and its competition is to look at how Price Points have developed in the market under the influence of the Internet. We will consider three price points: the Standard Leader products covering the largest segment of the market offerings, the Price Leader products serving the low-end of the market, and the Performance Leader products serving the high-end of the market.

At the Price Leader Price Point there are competitors delivering news direct to the consumer market. These competitors include formidable companies such as Apple, Google and Facebook. But where do those companies get their news? Primarily from their own echo system. Google gathers most of its news as it crawls the web. Apple and Facebook rely on publisher partnerships and some licensing. Facebook also benefits from some of its own user generated content.

In the Standard Leader middle of the market there competes all those companies seeking to replace all or part of the AP product. This includes competitors like the Ohio News Organization, mentioned above, who formed a co-op to replace some of the local AP products. Global Post came into existence in 2009 in an attempt to match AP. It failed to reach scale and left the market in 2015. More problematic are companies such as CNN Wire targeting digital publishers and broadcasters, and specialists like the Tribune Content Agency which offers lifestyle and entertainment content at somewhat lower prices than does the AP. Each of these firms and their ilk have weakened the Associated Press’ former monopoly position..

At the Performance Leader end of the market competes Reuters and Bloomberg, who offer faster and more complete content on business and finance. These two firms charge premium prices, above the price levels of the AP.

What do we note at each of these Price Points? At each Price Point, both the competition and the products are different from those at every other Price Point. A business is composed of products, competition and customers. Whenever any two of those components change, you really have a separate business. Each business requires its own strategy and tactics to create attractive products for distinct customers in competition with specific competitors.

The AP cannot succeed with the same strategy and products across all of these Price Points. To succeed, it needs at least a separate strategy to compete at each Price Point.

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