The Internet dissolves value chains
Most sustainable businesses are value chains. They link together one or more profitable activities with costly activities that would be loss-makers if conducted on their own in such a way that the overall enterprise makes a profit.
The printed newspaper was an example of one such value chain. It linked an expensive and unprofitable activity called journalism, with a highly-profitable activity called advertising (classified and display) in such a way that revenues from the latter outweighed the costs of the former. In many countries, advertising accounted for about 80% of newspaper revenues, far outstripping income from newspaper sales. There was a symbiotic relationship between the two activities. Good (or even bad but sensational) journalism attracted readers, which built circulation. Higher circulation figures attracted advertisers, who were given the prospect of reaching a bigger audience, and so a virtuous circle (or positive feedback loop) took hold.
When the Internet began to go mainstream in the mid-1990s traditional industries began to experience the painful ways it could transform businesses. One was its capacity for disintermediation — cutting out intermediaries like travel agents who stood between customers and services. A second effect was that it reduced transaction costs which meant that outsourcing became easier and cheaper. For the newspaper publishing industry, however, the most unpleasant surprise was that the technology dissolved the value chain on which the industry was built. This was because classified advertising works more efficiently on the Web than it does in print: users can search and quickly find what they’re looking for without having to wade through pages of small print; and advertisers pay less because a web entry is quicker, easier and cheaper.
Since classified advertising was the positive element in many newspaper value chains, its erosion and eventual disappearance in many markets seriously undermined the business model of print newspapers.
Further reading
Philip Evans and Thomas Wurster, Blown to Bits: How the New Economics of Information Transforms Strategy, Harvard Business School, 1999.
Wikipedia, “Craigslist”, https://en.wikipedia.org/wiki/Craigslist