B2B Media is the unglamorous sibling in the media family.

Historically what we used to call trade publishing was as unexciting as the actuarial business; and equally profitable, consistently profitable, consistently for decades. The kind of rock solid cash flow that you could take to the bank. Which is precisely what a lot of folks did during the Great Leverage. These old trade-publishing businesses were bought and sold like pork bellies. Just when the Internet was kicking into it's next cycle, just before the smelly leverage stuff hit the fan and precipitated the Great Recession and about the time when a generation was coming into the workforce saying "what is a print magazine Daddy?" So, B2B Media is right now in the really scary Act 4 of The Creative Destruction 7 Act Play.

B2B Media is in Act 5 of The Creative Destruction 7 Act Play

Act 5 is all doom and gloom. This Act in the play is when the lovers are separated and in great danger and it looks like they can never be reunited; "there is not a dry eye in the house." To mix the metaphors, this is the darkest hour before the dawn. This is the time when you cannot possibly believe that the light at the other end of the tunnel is not another train coming because that is precisely what it has been on the last few occasions that you pointed hopefully at the light.

Act 5 is messy, nasty and undeniably real. Every week we get more news of Chapter 11 restructurings, busted auctions, fire sales and shuttered businesses. We have not been here before. We have been in Act 3, Denial, for longer than most of us thought would be possible. But we are here now. So Acts 6 and 7 will follow. They always do. Unless you believe that there is no role for an intermediary between business buyers and business sellers. Or that Google will automatically take the lion's share of the profit from that role.

I believe that there will always be a great business as an intermediary between business buyers and business sellers. So Acts 6 and 7 will follow. I do not believe that Google will automatically take the lion's share of that intermediary role. In short, I believe that the future is so bright we will have to wear shades.

But, sadly, although we use the phrase "creative destruction," the reality is that destruction precedes creation and that causes a lot of pain.

But first, how did we get here?

Mom, It Wasn't Me, The Internet Did It

Or, "the PE bully hit me". It is easy to describe the three-factor storm that hit B2B Media:

1. Internet destroying the legacy print cash cow

2. Debt leverage from buyout deals

3. The Great Recession slowing all spending.

Any decent sailor can trim the sails and get through a one-factor storm. The really good ones can get through a two-factor storm. A three-factor storm sinks most boats; not all, but most.

So it is easy for management to say "not my fault guv". Actually it is quite sensible for many operating guys to keep their heads down while the financial guys battle it out. The behind the scenes Act 4 story is mostly between two actors, the debt guys and the equity guys talking in that quaint Wall Street jargon about "who will take a hair-cut?" This is polite language for "which investors will get less of their capital back? Will it be the investors who put it into your debt fund? Or the investors who put it into my equity fund?"

So it is tempting for the operating execs to pass the blame.

Baloney, as they say in Brooklyn. Cow poop as they say in the politer parts of Texas. Management messed up as well.

Can't You Read The Writing On The Wall?

Around 2003 there was a golden opportunity to restructure before the next recession and before the Internet dudes got their mojo back. A few B2B media CEOs seized that opportunity, but most missed the chance. At the tail end of the last crash, too many operating executives in B2B Media:

1. Said "phew, it's great to see that the Internet was just a passing phase." A bit later they changed this to experimenting in this "minor add-on the core business."

2. Did deals with Private Equity guys that were a lot more fun (at least initially) than doing the hard work of organizational restructuring.

That was a big missed opportunity. The runway at that time was long enough. It is too short now. That is why we are now in Act 5.

Print, Events And Online, Oh My

In the first in the series of markets, we looked at Financial Services. The first part in each market we look at is the current cash cows. In the Financial Services business we could see a temporary, cyclical interruption in some incredibly strong cash cows. Our thesis is that these will be disrupted by changes that are still nascent, but these cash cows are strong today. So management has some room for maneuver.

The problem for B2B Media is that none of their three historic cash cows are in great shape. That is why the extra impact of Leverage and Recession leads to Act 5, the blow-up phase.

The three historic cash cows in B2B Media are print, events and online. Lets take a deeper look at each.

The Print Cliff

Look at most of the B2B Media businesses and you typically see a print business that was started almost 100 years ago. It was a great business for a long time. They were - to use Warren Buffett's phrase about newspapers - the toll-booth in their market.

The business model was so strong that it supported as many as three print magazines in even small market niches. The # 1 market share did better than # 2, which did better than # 3 but even # 3 was viable.

The Internet took a giant wrecking ball to that toll-booth. You can now get the same content online. So people don’t need the print magazine as much. They might still read it occasionally and advertisers still want to reach them that way, but the readers and the advertisers now have online alternatives.

Which leads us to the Print Cliff, which is well known to any B2B Media manager.

There are fixed overheads and variable overheads. The variable overheads for a print magazine - to print another copy and mail it - are relatively low. This is not digital economics, the variable cost is not zero, but it is low. So when your revenues are above the fixed overhead Cliff, your business is in good shape, it is generating cash. (It might not be generating enough to satisfy the debt you piled on during the Great Leverage, but the operating cash flow is at least positive). But when revenues fall below the cliff, there is only one thing to do which is to close down the print magazine.

Many publishers have already done this. Others are in the process of doing this. Some are in denial, thinking that all that is needed is a rebound in the economy. They take comfort from the mantra that "there will always be a role for print." They are right, but that will be Print 2.0 and that is fundamentally and totally different from Print 1.0. We will look at that in a future post.

For Print 1.0, the current model, it is only a question of evaluating the speed with which you are moving to the Cliff. You will hit the Cliff; the only question is when will you hit it? You can judge the speed you are moving to the Cliff by the conservatism of your audience. Many publishers can plan on a couple of years. They are in good shape. If they can rejuvenate editorial, they can be a Print 2.0 success story and avoid the cliff. But time is running out.

The early adopter audience, such as in technology, have already hit the Cliff (Wired Magazine is an outlier that we will look at in Print 2.0 section in a future post).

At the other extreme if your audience, currently finds it more convenient to use print, you have more time before you hit the Cliff. For example, somebody working in an auto body repair shop can thumb through a grubby print magazine but would be ill-advised to open their laptop in the repair bay (even assuming they had WiFi).

Print cash flow rating: weak and getting weaker.

Events

The problems in the print magazine business have been visible for a long time. So all the major firms put in diversification strategies a long time ago. They built the three legged stool – print, events and online.

For a while, the events leg was keeping the overall businesses in good shape. Some senior executives started to describe their business as "events with print and online add-ons," meaning that events were the new core.

This makes sense. We are social animals and we cannot satisfy that need entirely online. If you doubt that, look at all the events for techies, the types who deride print and live online. Whether it is the Web 2.0 Summit, TC 50, or FOO Camps or Identity Workshops is a matter of subject and style and format, but they all do well.

There is a cyclical problem. The recession cuts the travel budget, let alone the $1,000 for that Conference where you will a) update your skills b) network for business for the firm that is paying the bill and c) network for a better job from a competitor of the firm that is paying your bill; the latter does not usually get mentioned in the email with the budget request ☺

So, many Conferences have been canceled and many that were still run lost money thanks to the Recession. There is a Conference Cliff as well, as there is in any business with a fixed overhead. You have to "make your nut." But most B2B Media executives are willing to lose money on one event or even two in order to build the brand, so that they can "mint it" when the recovery kicks in.

Unlike with the Print leg, this is reasonable calculation. The Internet does not destroy the need to get together face to face. It may increase it during times of great change.

But the Events business will need to change to meet the new needs in an online centric world. For a glimpse of the future of the Events business, go to a MeetUp event. That glimpse maybe unsettling for businesses charging lots of money for big events, but the Events business will have to change. We explore that in the next post on innovators in B2B Media.

Events cash flow: cyclically weak (recession hits budgets), but likely to be strong in future if they can adapt to people’s needs in an online-centric world.

Online

The reality that B2B Media executives face is that a $1 lost from a print magazine advertiser returns as 10c ($0.10) online. So you cannot scale the online business fast enough to recover the lost revenue in print.

The online ad rates maybe fine for a low cost blog operation. If a Blog-based site gets $3m in revenues the owner will do very well, making good profits. But a B2B Media business with a 3-legged stool (print, events and online) needs online sites that will generate at least $10m a year in revenue.

How many sites generate more than $10m in ad revenue? Online tends to follow a power law distribution, not the bell curve of the old trade publishing business - millions of sites less than $10k, thousands less than $1m, but only hundreds above $10m.

What about Google? They make $ billions and a few of those $ billions are from B2B. So the market is fine, advertisers are spending lots? No. Google is making lots. They get the “lion’s share” and look up the definition of that phrase. The scraps are not that tasty!

So, in our future post we will look at how to get more than $10m a year in online revenues and how to carve out a space in a world dominated by Google. The Twit Summary is: "it ain't easy."

BCG Quadrants In A Non-Linear Three-Factor Storm

The standard business school method to run a business with multiple lines of revenue is to use the BCG quadrant (named after the Boston Consulting Group that invented it). The horizontal axis is current cash flow and the vertical is growth. The top right quadrant has the "stars" which throw off cash and grow at the same time. You kill off the "dogs" in the lower left that have negative cash flow and slow/negative growth. You squeeze the bottom right "cash cows" (throwing off cash but no growth potential) in order to invest in the "future stars" in the top left (negative cash flow today but big growth potential).

So far so good; this play-book is tried and tested. It works. It is easy when times are good. Even when times are tough if can be managed. But what do you do when you have no stars? When you have one dog (print), one cash cow (events) and one future star (online). When nobody has figured out the model that makes the future star really shine? When the only cash cow is getting hammered by a recession? When you cannot raise debt or equity because your balance sheet is horribly over-leveraged?

That is that is the situation that many B2B Media firms find themselves in today. That is why B2B Media is in Act 5 of The Creative Destruction 7 Act Play.

In the next post, we will look at the innovation in this space. Enough of the destruction part! Where is the creation part of creative destruction going to come from? The next post will be more fun, I promise!