Monday, September 2, 2013

The Story Business (or "Why Companies So Frequently Misidentify Their True Industries")

The Passive Voice recently featured a video in which Kevin Spacey addresses the success of his Netflix-based show, House of Cards.

It's well worth the watch for a lot of reasons, but one thing that he said really resonated with me.

Before we get to that, though, here's a free history lesson.

John Rockefeller became the richest man in America based off of the highly successful, questionably ethical Standard Oil trust that he created.

Obviously the modern oil industry is extremely profitable due to cars and OPEC and speculators artificially inflating the price of oil and blah blah blah. But when Rockefeller burst onto the scene, do you know how many cars were around?

Not a one.

Rockefeller got into the oil game in the 1860s, and Standard Oil proper wasn't formed until 1870.

So how did he make all of that money without any gas-guzzlers sucking at the teat of Standard Oil stations? A lot of folks forget that the reason the company was originally called "Standard" Oil was because Rockefeller was making kerosene to be used in lamps. A lot of kerosene was of dubious and inconsistent quality, which caused a lot of fires. Hence Rockefeller wanted to create a "standard" kerosene that was consistently high quality, and thus didn't explode as easily.

For years and years, people were able to work, eat, and recreate after dark because of Rockefeller's superior kerosene, delivered via railroads and pipelines that he controlled, a perfectly vertically-integrated business.

But then a funny thing happened: Edison created the electric lightbulb, and all hell broke loose. J.P. Morgan backed Edison, while Edison's former protege, Nikola Tesla, teamed up with George Westinghouse. Though both sides competed against one another, the ultimate "loser" was Rockefeller, as electric lights replaced the older, less convenient kerosene lamps.


The reason "loser" is in quotes above is that obviously Standard Oil went on to do boffo business, and reach soaring new heights. How? Well, cars eventually came along. Standard Oil identified a by-product of the refining process that had previously been thought so little of that it had been poured out onto fields: gasoline. Amazingly, it happened to be a fine fuel for cars, and Standard Oil did just fine until broken up by federal trustbusters.

The important point to take away is that what Edison, Morgan, Tesla, Westinghouse, and Rockefeller each eventually understood clearly was that they weren't in the "electricity business" or the "kerosene business" at all; they were in the "lighting business" all along. Whenever a technology came in to disrupt that industry, when cost went down and convenience went up, customers seized upon it like sailors on rum.

There are countless examples of companies climbing to the top of their field, then throwing it all away because they had misidentified their business: Kodak thought they were in the film and camera business--in reality, they were in the captured image business. A bevy of internet startups like pets.com thought they were in the growth business--they were actually in the connection and social media business without even understanding the most basic concepts of those industries.

It's tough to blame them; innovating is hard nowadays, especially when a corporate bureaucracy gets in the way. Much easier to stick one's head in the sand and try to convince everyone else that what they need is what you're already selling, not that fancy new substitute that's cheaper and more convenient.

They point out all of the flaws with the new ideas--digital pictures don't look as good as film! Heck, Edison even arranged for a bunch of animals and a death row inmate to be electrocuted by Tesla's alternating current to "prove" how unsafe it was. I don't have to tell you that those weren't exactly winning PR strategies.

In entertainment, we've heard all of the arguments, not just limited to the publishing industry: "The quality is garbage! Production values are shoddy! You don't get top talent! You need gatekeepers to tell the people what they like! And heaven of heavens, what about distribution, promotion, and (shudder) nurturing?" And a good number of those arguments are true, at least for now.

There are plenty of companies and individuals that want nothing more than to shut their eyes, stick their fingers in their ears, and yell "NAHNAHNAHNAHNAH! CAN'T HEAR YOU! I'M IN THE BOOK/MOVIE/TV/INTERNET/SOCIAL MEDIA/ADDICTIVE MAKING CANDY DISAPPEAR GAME BUSINESS!"

And I suppose for the time being, that's fine. It's pretty clear that as with the light business before them, cost and convenience are starting to win out. Oh, there are plenty of people who used kerosene for a while because they either couldn't have or didn't want electricity, or heck, I don't know, because their significant other was boorishly ugly enough to the point that the weaker light concealed more of his or her flaws.

But eventually, in the U.S. and most Western countries, at least, electricity won out, and even the light market continues to shift as manufacturers continue to bring down cost by creating increasingly efficient bulbs. Over time, all of the arguments thrown out there by the old guard become worn down by (ta-da!) progress! New companies and innovations make it so that digital pictures are not only as good as film, but outright better than it. As the price of production of all kinds of media continues to fall, I think that Spacey's right that as long as the quality is there, customers will absolutely be willing to pay a fair price for the convenience of consuming that material however they want.

I suspect that those with their fingers in their ears in these various entertainment entities are hoping that their companies can stick around long enough to discover their "gasoline," their unknown waste item that will eventually prove itself valuable and save all of their companies.

Unfortunately for them, gasoline is the exception rather than the rule. I suppose paper books, blu-ray discs, and CDs could be burned for heat, but I'd just presume they not go down that path.

No, the companies and individuals that will end up truly changing the industry are those who figure out the game, those who continue to innovate and figure out not only how this convergence of media is going to work out, but also how best to address their customers' needs, to give them better entertainment for, as Spacey says, a reasonable price, delivered more efficiently.

Those will be the true winners of this burgeoning golden age of entertainment. We're just trying to help the revolution along.

Happy Hunting!

-D.J.

D.J. Gelner is the Co-Founder and CEO of Hunt to Read. Contact him directly at djgelner@hunttoread.com.

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