Facebook's business problems are symptomatic of many large digital firms

Facebook is wrestling with a business challenge more traditionally found in legacy media: how do you translate consumers that don’t think they have a commercial relationship with you into relationships that that other firms will pay for?

Despite 955 million active users and increasing revenues, the company has lost a third of its share value since its IPO in the spring.  The exuberance that surrounded its IPO and overpriced its shares has worn off and investors are realizing that being big isn’t enough to ensure business success. Its latest earnings reports show the firm lost money, $157 million, in the second quarter on income of $1.18 billion.

Facebook’s challenges are symptomatic of a long line of “successful” digital firms that are experiencing monetization problems, including Yahoo, You Tube, AOL, and Twitter. Despite large numbers of users globally, they still lack effective business models to generate revenue levels congruous with their size. They may provide great communication functions for users, but they are not transforming very well from innovative users of technologies to highly profitable commercial enterprises.

Part of their challenge is that they have to focus so much effort on non-paying customers and those customers think of the services as personal communications—making them resistant to many efforts to monetize them. This problem has long plagued traditional media, but they are conceived as mass rather than personal media and have been around so long that many people are now used to a certain level of commercial exploitation. They also have a proven track record of return on advertisers’ investments that digital media have not yet been able to deliver for many types of advertisers.

Large digital players will continue to evolve and can be expected to improve their financial performance over time, but it will take a good deal of innovative thinking about the business rather than about the technologies and social value of their services.

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Digital journalism reaches sustainability, but transitional business problems interfere

The income streams of digital news providers continue to grow and many have now reached the point of sustainability. Fundamental financial and business problems, however, are keeping publishers from moving out of print and becoming digital-only operators.

This leads many publishers and journalists to continue bemoaning the fact that digital media do not provide as much income as print and many still argue that organized, regular newsgathering and distribution cannot survive in a digital-only environment. They point to the fact that digital advertising produces only about 15 percent the income of print advertising—largely because it does not appeal to retail, display advertisers--and that paid circulation for digital products is growing slowly.

Their analysis is flawed, however, because publishers do not require as much revenue online as offline because the costs of digital operation are so different.

Editorial operations account for only about 10-15 percent of total costs of operation of print newspapers, but they are the primary cost for digital operations. About half of the costs of print are taking up by printing and expenses for getting papers to readers; when the costs of paying for and maintaining buildings and land used to house presses and circulation equipment are factored in, those costs rise to about 60 percent of total costs. Expenses to maintain the large advertising operations found in print newspapers add another 10 percent to overall costs and the managerial costs due to the large number of personnel and functions in non-editorial activities add about another 5 percent. Thus, switching to digital operations can take out at least three-quarters of the costs of print newspaper operation, making the lower revenue of digital operation sustainable.

A growing number of newspaper companies are already generating 15-20 percent of their total revenue from digital operations, making nearly enough money to sustain the kinds of journalism practiced by legacy news media. So why does negativity about the future of journalism remain so high and why are newspapers not yet moving to digital-only operation?

There are three primary reasons:

1. Print newspapers still continue producing above average returns compared to all industries. No publisher is willing to throw away those operating profits even if the costs of print operation are higher than digital.
2. Retail advertisers get more return on investment from newspaper advertising than any other form of advertising, including digital. As long as they remain willing to advertise in newspapers, no publisher is willing to give up the revenue stream and operating profits that they now provide.
3. Owners of print newspapers have a great deal of capital tied up in facilities, printing and distribution equipment that cannot be withdrawn because few buyers want to acquire the used equipment today.

The fundamental challenge today isn’t that digital journalism has not reached sustainability; its how does a publisher transition from the print to digital-only operation in a way that is financially feasible and desirable.

The transition is critical for society because it will bring with it the reportorial strength and organization that exists in newspapers. That is something that digital startups do not provide because they generally lack the capital to build and sustain staffs as large as those of print newspapers and because they lack the reputations and brand identity of established papers.

Newspaper owners, publishers, and journalists then need to stop decrying the digital revenue problem and start focusing on solutions to the business challenges of when and how to realistically reduce and end the print operations. It will happen at some point in the future; the problem is how to plan and manage the switchover.

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Cable firms and Facebook Continue to Disappoint their Customers

Serving and satisfying customers is a crucial part of  value creation in any business,but U.S. communication firms continue to struggle with the very basics and are being heavily criticized for poor service, price gouging, billing problems, and generally poor customer relations.

40 percent of the top 15 companies that most dissatisfy customers are communications firms, according to the latest data from the American Consumer Satisfaction Index.

The companies American most dislike include Facebook and cable systems, which operate as near monopolies and consumerss have no real competitors to turn to for better service. The scores for the companies are:

Direct TV: 68/100

Facebook: 66/100

Comcast: 61/100

Time Warner: 63/100

Cox Communications: 63/100

Charter Communications: 59/100

These are failing scores on any grading system.

The companies have little incentive to spend time and money to improve service and relations with customers because there is no real competition that can discipline the market and promote consumer benefits. The problem is compounded because cable services are largely unregulated and there are no watchdogs to demand better behaviour in the absence of market-imposed sanctions.

That means the only thing that can drive improvement is company pride, but it is abundantly apparent that these firms have no shame and really don't care what their customers think.

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