Saturday, November 8, 2008

The joys of a diversified business model

TV stations and networks were once a license to print money. They offered a multimedia experience and national reach, valued by all the major advertisers.

Then came cable, and satellite, then the Internet. The big three (soon big four) and their local affiliates were no longer the only game in town.

In this morning’s “Heard on the Street” column in the WSJ, Martin Peers (behind paywall) notes how far the TV networks have sunk. Profits are off (losses at ABC) for all the major networks, and this is before the nastiness of October’s financial meltdown.

Meanwhile, cable channel programmers are seeing increasing profits — because they charge cable (or dish) to carry their channels and thus get revenues from ads and from subscription fees.

This reiterates a point I make to my entrepreneurship students: you need a diversified revenue model, in case your intended source of revenue isn’t big enough (or the price falls, or it’s to volatile, or …).

I learned that lesson both from my own business, and also from my first consulting gig for Live365. Live365 had hoped to deliver eyeballs for a fee, but after 2000 there were too many website chasing not enough advertisers. In response to the efforts of the new team (which I was advising), they created a 3-sided market: charging many (but not all) listeners, charging all broadcasters (some were previously free), and still selling banner ads. (They also have click-through sales if you want to buy the song you’re hearing.)

The recession is going to last a year or two, and — as with any recession — the weak companies aren’t going to make it. The most resilient will be those with a diversified revenue model, so that weakness in one revenue stream won’t take down the entire company. Of course, diversification means that the revenue sources should be uncorrelated — if your revenue model is selling to realtors, banks and mortgage brokers, you’re toast.

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