Miscellaneous

A couple of quick follow-ups to my last post: first, a commenter points out that Career Builder is an example of a successful spin-off from a major media company. (Actually, from three media companies; I bet having ownership by multiple companies helped insulate the company from any one firm’s internal politics). So it appears that the spin-off model can work.

Second, the always-interesting Tom Lee points to the Washington Post’s online operation as an example of the spin-off model. This is a really interesting example because it’s closer to the core of the WaPo‘s business than Career Builder is to Gannett’s. And by all accounts, it was relatively successful. I’m pretty sure I’ve read multiple people comment that the Post is a local newspaper with a national website, which is precisely what you’d want a successful spin-off news organization to do.

The problem is that washingtonpost.com is nowhere close to being a free-standing organization. They get tremendous benefit from having access to content from the print Post, and while I haven’t looked at their business model in any detail, I’d be willing to bet that there’s massive cross-subsidy going on. That makes it a better website, but the problem is that it relieves the web side of the business of the need to come up with new, lower-cost methods for generating news. Which means that if and when the print side hits an iceberg, the online side won’t be able to stand on its own.

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Having recently read The Innovator’s Dilemma, it’s worth pointing out that the discussion Ezra Klein and Matt Yglesias are having about the decline of newspapers is a classic illustration of the principles Clayton Christensen laid out a decade ago. Internet news is a classic disruptive technology. At its outset, it was simple, dirt cheap, and in many ways inferior to established journalism. But it improved over time, and once it began to rival traditional journalistic outfits in quality around the middle of this decade, the “dirt cheap” part of the equation began to dominate. When your competition can produce a roughly comparable product for a small fraction of the cost, your days are numbered.

But here’s the really important point that Christensen made that is often missed in these kinds of discussions: it’s often close to impossible for an organization built around an older technology to retool for a new, disruptive one because their cost structures just don’t allow it. The New York Times is an expensive place to run. It’s got writers, editors, typesetters, delivery trucks, an ad sales force, a big building, travel budgets, and so forth. In order to recoup those costs, they have to make a certain amount of revenue per unit of output. The institutional structure of the New York Times makes it almost impossible for it to produce news the way TPM Muckraker or Ars Technica do. The need to make payroll and cover their rent makes it almost mandatory for them to focus on their traditional core competencies because even as those markets shrink they still offer better margins than the emerging businesses.

Matt’s suggestion of launching NYTList a decade ago illustrates the point well. It’s true that in the long run this probably would have made the Times more money. But in the short run this would have been a truly wrenching transition. At a time when other papers were enjoying fat margins from their classified business, the Times would find more and more of its classified customers switching to the new version. It would have had to start laying off the classified staff and trimming other parts of the budget to cover the lost revenue. And it would have been a huge gamble. It was far from obvious in 2000 that Craigslist would be as big as it has become. So yes, theoretically an enlightened NYT manager could have foreseen the growth of Craig’s List and countered it. But in practice doing so would have required super-human foresight and determination, and an extremely deferential board of directors.

Christensen’s conclusion is that the only way to avoid this grim fate is to spin off an independent subsidiary that can pursue new markets without worrying about fat profit margins or cannibalization of existing product lines. GM’s spin-off of Saturn in the 1980s is a good example of this model. This is still an extremely difficult thing to pull off. It takes a CEO with the foresight to see what’s coming and the political capital within the firm to shield the spin-off from the parent company’s politics. I’m not aware of any high-profile newspaper firms that attempted this, but I’m not sure we can really blame the newspaper managers. It’s a really hard thing to pull off. Christensen was only able to find a handful of firms—in any industry—that pulled it off successfully, and the CEOs who did it almost all said that it was one of the most difficult things they did as managers.

Companies are not big people. They change much more slowly than individual people do. And anyone suggesting that a firm should do things in a new way—even the guy at the top—is going to face strong pressures from traditionalists who want to continue doing things the old way. And in the short run, the traditionalists are almost always right. The old way of doing things is almost always going to be more profitable in the short run. So although I think those who predicted the newspaper industry’s decline are entitled to a certain amount of smugness, I think it’s absolutely not fair excoriate the managers who failed to move more decisively to address the problem. With the benefit of 20/20 hindsight, it’s easy to come up with scenarios that would have turned out better. But from an ex ante perspective, these trends were far from clear, and the people making the decisions were under tremendous pressure to continue the status quo.

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Incidentally, the bureaucratic dynamic I wrote about in my last post also explains why efforts to “reinvent government” to reduce “waste, fraud, and abuse” never work very well. The problem isn’t that there’s no waste, fraud or abuse, or even that these policies don’t succeed in rooting some of it out. Rather, the problem is that policies designed to make government more efficient and accountable accumulate over time. So the new policies the Obama administration implements to deal with mismanagement that occurred under the Bush administration will largely co-exist with policies implemented under the Clinton, Reagan, Carter, Johnson, Kennedy, and Eisenhower administrations to deal with problems observed under their predecessors. There was probably a good reason for each set of rules by itself, but when you add them up, the result is a kind of death of a thousand cuts where federal bureaucrats can’t get anything done because doing anything requires a huge amount of paperwork. And then of course we have “paperwork reduction acts” where we hire a whole new set of bureaucrats to promulgate still more rules ostensibly designed to make the earlier rules less complicated. Not surprisingly, it doesn’t work especially well.

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Another great essay from Paul Graham:

Checks on purchases [at large companies] will always be expensive, because the harder it is to sell something to you, the more it has to cost. And not merely linearly, either. If you’re hard enough to sell to, the people who are best at making things don’t want to bother. The only people who will sell to you are companies that specialize in selling to you. Then you’ve sunk to a whole new level of inefficiency. Market mechanisms no longer protect you, because the good suppliers are no longer in the market.

Such things happen constantly to the biggest organizations of all, governments. But checks instituted by governments can cause much worse problems than merely overpaying. Checks instituted by governments can cripple a country’s whole economy. Up till about 1400, China was richer and more technologically advanced than Europe. One reason Europe pulled ahead was that the Chinese government restricted long trading voyages. So it was left to the Europeans to explore and eventually to dominate the rest of the world, including China.

In more recent times, Sarbanes-Oxley has practically destroyed the US IPO market. That wasn’t the intention of the legislators who wrote it. They just wanted to add a few more checks on public companies. But they forgot to consider the cost. They forgot that companies about to go public are usually rather stretched, and that the weight of a few extra checks that might be easy for General Electric to bear are enough to prevent younger companies from being public at all.

One of the most challenging things about this kind of institutional bloat is that it’s extremely hard to articulate to those in positions of authority precisely how damaging this kind of institutional overhead can be. I’ve been involved in at least one organization (which shall remain nameless) that had created elaborate processes for reviewing and double-checking moderately expensive purchases. And the phenomenon Graham described applied with a vengeance in those cases. The minor cost was the dozens of hours devoted to making the case to the relevant decision-makers for our preferred option. But the more important, but harder to articulate, cost was the way the approval requirements distorted the decision-making process. Since we’d have to defend our choices to decision-makers who didn’t know very much about the options, we tended to overweight factors that could be clearly and easily explained to the decision makers (“This supplier is the market share leader,” “this candidate has a PhD”) and underweight more important but harder-to-articulate qualities of the various options. And because we had to gather a lot of mostly useless information about the options to present to the decision-makers, the most qualified suppliers would often opt out of dealing with us, because they could get business with a lot less hassle elsewhere.

And this organization was not especially large, in the grand scheme of things. These problems tend to get worse as an institution gets larger and older. I was just talking to a friend who works with a firm that provides services to large banks, and she was complaining about the large amounts of money large companies waste on this kind of overhead. And the condition is almost terminal in one of America’s largest and oldest institutions—the federal government. The reason we have $600 toilet seats isn’t that the people buying them are corrupt or incompetent. It’s that selling a toilet seat to the federal government costs $50 to manufacture the toilet seat and $550 to fill out the relevant paperwork.

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