Atomiser attack puts incumbents on back foot
ONE of the key strategic challenges that will confront David Kirk when he starts work as the new CEO of John Fairfax on Monday is what to do about the internet. Perhaps he should have a chat to Telstra's Sol Trujillo.
Both Telstra and Fairfax have been criticised for their "failure" to respond effectively to attacks by more agile competitors on their core revenue bases Telstra because its dominance of fixed-line telephony is being eroded and its copper-derived revenues cannibalised, and Fairfax because its "rivers of gold", the classified advertising markets it has dominated for so long, are under siege from new online competitors.
In both cases, long-held near-monopoly positions are under threat from competitors exploiting new and superior technologies to offer a different customer proposition, although Telstra's predicament is also complicated by a regulatory regime that tilts its playing field towards its competitors.
Both are accused of being slow to respond to the emerging threats, which for Telstra lie in the accelerating substitution of wireless for fixed-line services, the rolling out of competitive broadband infrastructure and, just over the horizon, the Voice Over Internet Protocol technology that threatens to decimate the margins in traditional telephony services.
Fairfax is being attacked by young pure-play companies using the internet to systematically assault each of its major classified categories. Threateningly, some of those players are being drawn into the fold of a rival, the Packer family's PBL.
The dominance of Telstra in fixed-line telephony and of Fairfax in classified markets means the revenues being targeted are high-margin, and therefore massive amounts of shareholder value are at risk. Their ability to respond to the attackers is, however, limited precisely because of that value.
In a 2001 paper, McKinsey directors David Campbell and Ron Hulme described players who extract value at the expense of incumbents as "atomisers" who thrive by exploiting a better business model to challenge the status quo. A key feature of the atomisers, the paper said, was that attackers have everything to gain and nothing to lose.
It didn't say, but could have, that because it is their revenue bases that the atomisers are targeting, the dominant incumbents have nothing to gain and everything to lose.
Attackers have another massive advantage because they tend to generate optimism and patience. Mature companies have to generate actual performance, consistently, or the market punishes them.
Telstra's position is, of course, somewhat different to Fairfax's because its attackers include some very large international companies SingTel Optus, Vodafone and Hutchison among them. The cherry-picking strategies even the largest telcos are using against Telstra are, however, similar to those being used against Fairfax.
It is easy to criticise a Telstra or a Fairfax for being slow and unimaginative in responding to the threats to their dominance. Fairfax could, its critics say, have pursued its own online strategies more aggressively and effectively and should have acquired seek.com.au and carsales. com.au rather than let them fall within the orbit of PBL.
The incumbent's dilemma is that the revenues the atomisers are pursuing, and on which their value is predicated, are its own. It can't do anything that accelerates the cannibalisation of those revenues without destroying its own shareholders' value.
Acquiring the attackers also creates complex issues, given that the incumbent would effectively be buying, it hopes, its own future revenues but paying for them today. Either way it crystallises a loss of margin and value.
The ability of incumbents (and it isn't an option for Telstra) to acquire their challengers is also constrained by the fact that, unless desperate, it would be illogical for an attacker to allow itself to be acquired by them.
Why was PBL invited to acquire strategic holdings in Seek and carsales, and why was it prepared to pay more than Fairfax? Because it has no classified revenues of consequence to protect. It, too, is an attacker, not a defender. It wants to build the aggressors, not constrain them.
Faced with the threat of devastation, immediate in Telstra's case and, given the relatively modest (but rapidly growing) volume of online classifieds, medium term in Fairfax's, how do the incumbents respond?
One approach would be to do nothing and invest nothing in counter-strategies while using legacy revenues to diversify. Another would be to milk the legacy positions for as long as possible while gradually replicating the attackers' business models. The strategy of last resort and the probable eventual endgame would be to abandon remaining legacy revenues and use their far larger resource bases to tackle the new players head on.
Telstra and Fairfax have adopted middle courses, milking their dominant positions, investing in new areas and, while establishing positions in the attacking technologies, trying not to lead or amplify cannibalisation of their legacy positions.
Telstra, which until recently had finessed the defensive game neatly, has been more aggressive, because it has had to, in shifting towards a hybrid offering, sacrificing some margin to retain customers with bundles of new and old services. Fairfax could do more blending of the old classified offerings and the new.
For both companies, however, there will be a delicate and vital tipping point, where to defend their residual legacy positions would be pointless and would destroy their ability to make any transition from their former business models to the new paradigms.
Hindsight will be the only way to judge definitively how well, or badly, the incumbents have managed the balance of defence and aggression. By then, of course, it could be too late.