Why the SPIEGEL fails at digitization

DER SPIEGEL is an icon of German journalism. Hardly any other publisher in Germany produced equally outstanding journalism for decades. And that’s why it seems worthwhile taking a look at the change of the last 10 years and why the magazine staggers between “Innovator’s dilemma” and wrong product alignment and fails at digital transformation for the time being. And no, this will not be another cheap lament on printed journalism.

1. Digital Products
2. “DER SPIEGEL”: The Innovator’s dilemma
3. Newspaper business in the Digital Space
4. The Product Problem
5. Journalism, Publishing and Marketing

1. Digital products

The driving force behind the ominous change we call digitization is the loss of friction. Friction in the production process (or more precisely throughout the value chain) provided for decades and centuries that products could only slowly circulate through the economic cycle through manufacturing, storage or production processes. The shift of the economic processes into the digital space makes some processes faster and some redundant. Overall, the whole production process runs smoother, in essence without friction. While some industries digitize by migrating only parts of their value chain, for other industries all components of the service provision gradually move into the digital territory.

Designing and creating completely digitized products is very difficult. Young, highly focused companies venture to master the new space, albeit at the very high development costs associated to it. On the other hand, established companies, especially if they have been successful in the market so far, often encounter considerable problems (apart from providing gigantic amounts of money) due to the firmer structures and – despite their effort – a certain digital clumsiness. Often they attempt to pour their product into a digital framework in order to gain cost-effectiveness. And often they fail at this attempt. Although the reasons for those failures become more and more obvious, they are surprisingly little known.

In the digital economy rules are different than in the post-world-war-II-economy. To start with, digital markets work according to the “winner takes all” principle: Because of the
lack of friction, it is sufficient for a product to have a small advantage, to be winning. For example, imagine two Kebab shops in your street. Kebab Shop A tastes just a little better than Kebab Shop B. Nevertheless you will probably go to Kebab Shop A. But besides yourself, all other customers probaby go for the same kebab, so that sometimes the qeue is very long and sometimes they do not even have a kebab anymore. Which is the latest point, when you switch to Kebab Shop B. After all it is only slightly worse. In the Internet this does not happen. Why? Because Shop A produces a new Kebab in milliseconds. After all, here Kebabs are made of ones and zeros, replicable infinitely. There are no queues. Everyone wants Kebab A? Everyone gets Kebab A. Winner takes it all.

Once you have developed a product with a demand (nowadays they say: “A product customers love”), it is infinitely reproducible and available. From an economic point of view, this is a fantastic business model, for providers and customers. Which in the case of Facebook and Google leads to digital monopolies that are very popular with the user. For the suppliers of professionally crafted content, another party in the game, however, this monopoly alliance of users and distributors has developed into a nightmare. Example: journalism.

SPIEGEL magazine, Zoo station
There is still plenty of printed journalism. “Der Spiegel” in the Kiosk display at Zoo Station, Berlin.

A good counterexample of a friction-less process is the production of a magazine, because magazines are made by people. They research and write, make photos, typeset the texts, manage ads, print and deliver. Friction is daily business here. To be able to overcome that friction is the core of the business model. From the point of view of the newspaper publishers, the question arises, whether it in this friction-less world, will be possible to have a viable business? How compatible are friction-less space and friction-burdened business model? The answer is clear in my view: it is difficult, but – with really thoughtful strategic choices – possible. And it does not work without changing your old model to the new digital one. Align rules and resolutely rebuild.

2. “Der SPIEGEL”: The Innovator’s Dilemma

The SPIEGEL, for example, seems to lack a correspondingly strategic vision. And that may be exactly because “Der SPIEGEL” is an icon of the German Post-war journalism. Hardly any other publisher in Germany can claim its reputation for good journalism. And that’s why it’s worth taking a look at the change that has taken place here over the last 10 years and why this journalism also happens to fail in the digital change. And no, this will not be yet another cheap lament on printed journalism. Journalism is by no means dead. It only happens to be a less interesting business. It’s about time that those with a heart for journalism get in gear and realize that the existence of journalism does not depend on a product and its reason for existence is more than whopping profits with printed paper (That is difficult, considering that the human brain is already confused for days, if you place the garbage bin in the kitchen in a different corner).

What stands in the way of the SPIEGEL Group is the self-image of the newspaper publishing house. How deeply these values ​​are anchored in the company can be grasp with a quick look into the self-depiction on the SPIEGEL website (shortened):

“The SPIEGEL is published weekly in an edition of approximately 900,000 copies, printed by Mohn Media in Gütersloh and Stark Druck in Pforzheim. To be punctual and to be as quick as possible at the kiosk and with the readers, the entire edition is printed in about 20 hours and processed into issues. That means: more than 750 magazines are printed per minute. For the production of “Der Spiegel” a lightweight, coated paper of 54 gsm is used; for an average issue just under 280 tons of paper are required. The quality provides an optimum of brightness, color and opacity under consideration of environmental requirements. The cover of “Der SPIEGEL” is printed on a high-weight, 115gsm paper.”

280,000 kilograms of paper printed at high speed; curious readers expecting their edition … at the newspaper stand? (Aren’t they called Späti (Late-y) in Berlin nowadays, selling, well.. Beer?) And the whole thing takes, what? 20 hours?

Perfectly at home in the world of printing and its industrial blooming, the portrayal of the sober corporate side turns out as a trip to the late Sixties. In the paragraph one feels all the pride and the drama of the dwindling old-time journalism. It’s ultimately those cultural roots, which make it so impossible for the SPIEGEL to arrive in the new paradigm. If then you take look at the numbers, you have an innovator’s dilemma in its purest form.

At first glance, the financial results of the SPIEGEL 2017 were not bad: The profit climbed to around 30 million euros, compared to 2016 with around 26 million and just 6 million the year before that. Responsible is an uncomfortable restructuring course. The advertisement disposition went to the SPIEGEL co-partner Gruner + Jahr, around 150 colleagues had to leave. The goal of the renovation: costs have to decrease by € 15 million annually from 2018 onward. Why that cost reduction is so drastic becomes clear, when you consider the two reasons for it: less magazines are sold and the extra money from advertising sales shrink. The publisher faces the problem of sinking revenue which can’t be compensated by new profits from growth on the product side, but must be made up for by savings on the production side. This may be difficult but possible with a product like a car and over-the-top innovations. For a product that is mainly the result of the clever minds of its employees shrinking means loosing brain; the product is rapidly deteriorating. The downward spiral begins to turn.

In 2016, the group sold an average of 783 575 magazines per week (IVW). In the fourth quarter of 2017, the number dropped to 730,990 copies. Also, ad sales have declined: In 2017, SPIEGEL sold 8.2 percent less classic print ads than last year. The negative numbers are dramatic because that printed magazine in which these ads appear is responsible for two-thirds of the SPIEGEL Group’s total turnover. The share of ad and sales revenue of 269 million euros in 2016 was around 68 percent.

So there can hardly be any doubt that the printed SPIEGEL magazine still is the heart of the group. Without the printed editions revenue, the group cannot survive. But at the same time, with the cultural and economic hegemony of this branch within the enterprise,the chances of a digital re-orientation are significantly lower: The Innovator’s dilemma. Furthermore “Der SPIEGEL” has a unique ownership structure, where the majority is controlled by privileged employees, mostly working within the printed journalism branch. If they don’t support restructuring, nothing moves.

3. Weekly magazine business in the digital space

Publishers of journalism had a competitive advantage on their side up until mobile came along. Namely, the industry’s own friction in the form of print shops and printed paper as a content and advertising medium. Printing a newspaper was and still is expensive. That is what made the limited space on paper so valuable. This limiting factor made for a good business for about 150 years, as long as enough readers were interested. In addition, the newspaper publishers often also controlled the printing companies as the decisive point in the value chain.

Just to put this into perspective: A printed advertising page in “Der SPIEGEL” today costs about 77,000 euros – the production of this site is likely in the low cent area. This advantage turned into a disadvantage, as the attention of the readers slowly migrated into the digital space and this space became available everywhere and at any time. Here, you could purchase and offer a similar added value for advertisers (that actually only consisted of printing a page) and a similar product offer with almost no costs. The companies, who wanted to attract new customers, followed the attention of the desired audience, because they were not particularly interested in the journalistic product per se (or the printed unit), but rather in its readers and their attention.

Unsurprisingly, the publishers moved swiftly into into the digital space, transferring their business model and their product with as little changes as appeared necessary. They used the new possibilities diligently and partially economically successful, at first glad about an additional sales channel. The proceeds were confined, however, now exclusively to the former “Zubrot”, the Advertising money, because nobody wanted to pay for the old service in the new environment. The problem was and is that the publishers did not realize that with the loss of friction their business model was no longer sustainable in the digital environment. The perceived channel was none at all. The conditions had changed fundamentally.

People do not buy great content

Ad slots are theoretically unlimited in the digital sphere and thus worth very little. Remember the Kebab Shop. You want Kebab A, you get it. Infinitely. Furthermore, ads are sold, for example on Google, by automatic auctions. Machines run the business. Usually you get your search ad placed on Google for a few euros, often only cents. But because ad space providers have virtually no costs to place the advertisement, they are still highly profitable. Yes, servers do cost a lot, but costs can be distributed over billions of ads, leading to marginal cost approaching zero. That alone was bad enough for the business model of the printed newspapers and magazines, because there, people sell ads. And space is limited.

At the same time, on the internet content is virtually unlimited. That may vary for every single topic, but overall the normal state is abundance. That’s why Google’s service is so popular. Finding content has been the central problem for more than 20 years, not offering content.

When Facebook entered the stage, especially after mobile took off, they added a variant of the internet, where personal relationships were digitized. Now the transition from an anonymously used “open” internet to personally used “closed” network was becoming the norm. People spend their time on Facebook, with data connected to their personal interests. Now the abundance of content could be delivered to you on a personal level based on your interests, paid or unpaid, without you even searching for it. (Remember: ease of use wins)

In retrospect, it is obvious that with this change, the nature of content also radically changed. The norm was no longer mass media, but personal, or “social” media. Linkedin, Pinterest, Facebook (and Google) are so successful because they guarantee the quality of choice for each user idividually, but not the content itself. In the state of abundance, you don’t necessarily win on the best content offer, but by serving the demand most accurately and comfortably. Going back to our tasty Kebab: It does not even have to be better than Kebab B for ever. Once it has aggregated demand, good enough is enough for the user to keep coming back.

On the internet everyone can be a content provider who wants to offer content (or everything else). The limiting factor “printed copy” and the associated increase in value of a any piece of content solely by the shortage of supply is no more given (after all, you read this essay completely free and that’s only because I decided to be a provider today). Mediation of demand is what really counts in the digital space.

For a company that produces journalism, one revelation is central: People do not buy magazines or newspapers because the content is so great. Neither the form nor the content was the USP, but controlling supply. It is tragic that the self-image of many journalists is still built around the perception, that their texts generated demand. That was clearly wrong. There just wasn’t an alternative before mobile internet. With the realization that the articles in a printed magazine have never been that important to the reader, producer of printed content
a) need to change the way they control their customer relations in the digital world
b) need to change the nature of their content

4. The product problem

I think you cannot blame magazine publishers in general and the SPIEGEL in particular, for not having tried. “DER SPIEGEL” has created three different formats designed to monetize their journalism in the digital world: “SPIEGEL daily”, “SPIEGEL Plus” and Bento.

The per-click payment service LaterPay (this is the service provider that monetizes “SPIEGEL Plus”) gives a hint on its Website, how successful the SPIEGEL is at selling individual articles:

“SPIEGEL Online has sold more than 3 million articles with LaterPay since the introduction of it’s paid content offering SPIEGEL Plus.”

An article costs 0.39 cents there. The extra money adds up to around one million euros. That however contributes little to the company’s result. But above all, the number should not fool us into believing that disposable content items are not a sustainable, secure approach for company success. Why? Because one-time readers are not an attractive customer group for a company that wants to produce journalism (And here the emphasis must be on “produce” rather than “journalism”).

The SPIEGEL has high fixed costs in the form of offices and personnel costs and an unpredictable and perishable raw material in the form of news – you would expect a disposable article at low prices to be produced differently. If the SPIEGEL wants more one-time sales, they maybe should just be selling directly through Facebook. But then their customer relationship would be weakened even further. Facebook would own the customer, not the SPIEGEL. The SPIEGEL needs to produce its “Original SPIEGEL journalism” regularly with predictable proceeds, not one-time revenues.

Stefan Plöchinger, former head of sueddeutsche.de is now expected to get online products on track. As head of product development, he will have to take care of the paid-content strategy and increase revenues. That alone gives us a clear hint that the strategic implications have not arrived yet. The SPIEGEL shouldn’t be concerned about paid content, but about paid journalism. The SPIEGEL does not win with products, but with customer relations, which is the only way to guarantee a fixed revenue stream, which would allow journalists to produce high quality content. As I have tried to argue, the customers do not first and foremost buy lines on printed paper or HTML code in the browser. They buy the special perspective, the special kind, the choice of topics, the attitude, in short the Journalism of the SPIEGEL. In other words: The customer pays for the production of journalism, not the single product. This distinction is essential to be successful.

DER SPIEGEL opted instead for a very contrary approach. A product that does not have much in common with the journalism of SPIEGEL at all: Bento.
Bento is – in its self-depection – a medium for a younger audience:

“Bento is the young offer of SPIEGEL ONLINE. Bento shows what 18- to 30-year-olds are really interested in, what concerns us and where we stand. Because if there is news everywhere and too much, we choose what’s important to us. “

That may sound nice in theory. In practice, Bento is a portal, which works through click-baits, thus distributing even more unimportant news (which Bento actually promised to filter out). Click-bait articles are dumped into the internet in order to create space for ads and paid content offerings. When I have a look at the Bento homepage, there are articles waiting for me like “A passenger doesn’t stop farting – plane has to perform emergency landing” and “Soon there will be vegetarian hot dogs at IKEA “(both no joke). There is little left of the SPIEGEL’s quality journalism here, the brand SPIEGEL is consistently diluted further – and this is a continuous phenomenon.

DER SPIEGEL had already founded “SPIEGEL ONLINE” in 1994, a new company apart from the original staff. To date, the editors of “SPON” (SPiegelONline) and the SPIEGEL magazine writers are hierarchically and spatially separated, as well as the Bento editors. From the outset, it was clear that SPIEGEL Online is a different product offer and is not to be confused with the actual product.

But that does not matter to users. You notice that with the SPIEGEL, but alos with SPIEGEL ONLINE and now with Bento that its contents are ever further watered down, the researches are becoming more superficial. To establish a payment service like SPIEGEL plus or SPIEGEL daily into a market situation like this (Dilution of the umbrella brand, establishment of superficial content portals) is a strategic mistake. The signal that is being sent is not “If you want more good SPIEGEL journalism, then you have to subscribe to SPIEGEL “, but rather: “If you finally want some sensible content, then, trust me, you have to buy the good items for 40 cents a piece. ”

Nevertheless, the SPIEGEL seems undeterred by customer needs. They set their minds on new products to solve the declining sales figures. I have found 21 products that have any combination with the word SPIEGEL in their name, Bento not included. Almost all are text. Unfortunately, lots of product launches also failed: The best-ager magazine SPIEGEL Classic was dumped after one issue. SPIEGEL Television did not even start because the market tests failed. And also the success of the daily newspaper SPIEGEL Daily is apparently limited. Such failures are the logical consequence of the wrong product- and content-centered strategy. One wonders why the SPIEGEL thinks he knows better than the giants Amazon and Netflix. At Amazon you buy the cheap subscription with attractive content and then you pay for filet pieces extra anyway. Netflix eliminates single purchases altogether.

No one expects everything to be free

Instead of continuing to play on reach, the SPIEGEL would have to be very stringent to align to his loyal customers and by sharpening the journalistic profile and the technical possibilities, renewing the values ​​proposition for this special circle: Becoming more personal, not cheaper. Offer fewer products, not more. Simplify with all technological possibilities to create convenience for your customers.

The share of subscriptions for the sold circulation is 49.8 percent, which adds up to around 370,000 loyal customers. With 56,000 subscriptions the digital edition of the SPIEGEL is round the highest of a magazine in Germany already, but certainly has a lot of room for improvement. And with SPIEGEL ONLINE there is enough customer contacts with potential new subscribers. It would be a good starting point for a new strategic approach: To finally face the fact that the online ad business has been lost to the monopolists. Let the adds go. That would make it clear to each new subscriber what he or she actually buys. The core users will also be willing to pay, probably more. Because this basic condition has changed tremendously on the internet in recent years: No one expects everything to be free.

5. Journalism, publishing and marketing

Although the components reporting, publishing and marketing were closely linked in printed journalism, it has become clear that in the digital framework they may have significantly fewer synergies than before. That brings its own challenges for marketing. However, it frees journalism’s business model from being tied to the idea of mass media, opening the way to profitable closed systems.

The idea of a mass media in the classical sense is obsolete, and we can witness several of its former functions seize to exist. The new status quo is: Everyone can say everything to everybody. In public. That’s as scary as it is real. The journalistic form of the last 60 years could only shine under the conditions of friction. The same business with similar (albeit shrunken) structures cannot operate profitably in the digital paradigm. Consequently, after Stefan Aust, all chief editors of the SPIEGEL failed at the “Innovators dilemma”. While Aust still had success integrating other media types into the brand, aiming to shape a media group out of the printing business, all chief editors after him lacked a vision and failed. Because consequently they could not overcome the dilemma with counter-intuitive, long-term strategic decisions, which would have harmed the core of the company, but would have secured a passage into a different future.

But what is true for the SPIEGEL, is not necessarily true for journalism in general. Because the familiar production and distribution of journalistic work has never been identical with journalism per se. It was just one possible form of it. New technical possibilities require and allow a new, contemporary form and a new and different organization. And the basic need for journalism remains: People continue to have great interest in topics and decisions that concern them personally or as a group; where they live, in the language that they speak.

For all the worries about a technologically forced change that we cannot determine or stop: The digital world offers exactly the technological possibilities necessary for a new kind of journalism. Only when this new journalism is strategically aligned with its business model and the business model is fundamentally rooted within these new possibilities of the new paradigm, it will be sustainable.

Of course we are especially happy about thoughts and feedback from all of you, who managed to read up to here. Just send an email or use the comments section.

Revelation: Marvin and Florian wrote the article together. Florian worked 15 years ago for a company of the Spiegel Group.