Commentary

Corporate Salvation: Red Flags, Digital Solutions At Hand

With red flags going up everywhere, it is time to start your enterprise engines. The rush of bad news--from meteoric oil prices and the credit crunch to volatile global relations grinding down the U.S. economy--is devastating consumer and advertiser spending as well as overall corporate finances. Upside solutions can be found in the explosive surge of high-tech developments.

The first step is examining everything through a transformation filter--how to reinvent companies and develop new business models. Then test, modify and thrive. With traditional business models eroding, companies have everything to gain by masterminding the use of interactive connections to lower costs, improve profits and establish more productive constituencies.

Case in point: Game Stop's meteoric growth into a $7 billion business, recently bolstered by the release of "Grand Theft Auto IV," is a testament to the recession-resistant popularity of video games. It is the most effective sustainable category combining elements of engagement, socialization, creativity, networking, commerce and advertising into all things digital.

Fast-forward: As the digital home hub becomes mainstream and interfaces with existing wireless mobile platforms and devices, gaming will be broadly applied to endless entertainment sites. But imagine having your own Internet avatar slugging it out with contentious bloggers, chatting with friends, searching for goods, bidding in online auctions and virtual games.

Case in point: The Netflix $100 TV movie delivery box is a simple, long-overdue step toward free, unlimited instant movie downloads. The technology, players and economics are in place waiting for an interactive hybrid TV-PC home device. Sony's plans to distribute live concerts, Broadway theater and sports events to movie theaters is just one step removed from bringing its Hot Ticket service direct to home-entertainment centers and mobile devices.

Fast-Forward: The mail-delivered and neighborhood rental movies will be laughable vestiges of the past sooner than you think. Netflix's minimal incremental return on an estimated $70 million in annual digital electronic delivery investment will take off on the backs of next year's mandated digital conversion and digital partners, which could integrate the new Netflix technology into their devices (such as Microsoft's X-box 360).

The overhead and operating expenses that will be saved, and the rise in distribution margins that could be realized through direct free electronic delivery, are woefully underestimated. Netflix's near-30% average growth in earnings per share--second only to Amazon, according to Lehman Brothers--is evidence of consumers' healthy demand for such services.

Case in point: Barnes & Noble--the nation's largest bookseller with about one-quarter of the retail book market--could make a bid to buy its closest brick-and-mortar rival, Borders Group, which is right behind Amazon.com WITH 15% market share. Amazon has arguably saved an otherwise flat $15 billion consumer book business. A prolonged economic downturn will hasten this structural transformation in many industries.

Fast-forward: Amazon's premium shipping, reliability, aggressive recommendations network and competitive pricing provide a virtual retail model. Creating temporary cost savings through mergers is only a short-term solution in the digital market. The powerful virtual economics will change the way federal regulators view potential anti-trust issues.

Case in point: Now that broadcast and cable networks have settled into ad-supported online content download model, they are defending their penetrable walled gardens. Their branded sites, led by Hulu.com, provide thriving alternatives to individual paid iTunes downloads. But traditional media is a long way from making up new digital revenues that are lost from their legacy businesses. Their legal tangles with online services such as YouTube--and WITH ADD Redlasso, which dabble in unauthorized search, CLIPS and posts of network online fare, will continue.

Fast-forward: One approach to distinguishing themselves is with compelling original Web content. In fact, creative storytelling tailored for short-attention content-grabbing consumers is the next killer application, according to Michael Eisner, former Disney chief and now CEO of Tornante Co., which owns Vuguru, a digital content company. Companies that provide a revenue-sharing, accessible platform for new creative talent and more structured storytelling (however brief) will have a competitive edge. The willingness of digital consumers and advertisers to stick with an ad-supported good story--whether 90-second or 30-minutes long--has barely been tested.

Case in point: Microsoft Corp.'s Live Search rebates to consumers who buy advertisers' products online may look like a desperate counter to Google's search dominance. But it embraces personal relevance and economics. Product rebates of 2% to 30% become PayPal accounts or in-mail rebates of $5 or more on which Microsoft breaks even. Online merchants signed on include eBay, Barnes & Noble, Overstock, Sears, Circuit City, Home Depot and Zappos.

Fast-Forward: Although other online retailers and e-commerce brokers use this technique, it has much broader implications for interactive ads. Electronic coupon codes and other evolving virtual promotions will be integrated with more creativity and less intrusion in targeted socializing, searches, location-based activities and communications.

Clearly, some of the good news we seek--in light of a forecast $150 barrel of oil this year--is ours for the making, given our new digital options and good old human ingenuity. The latter deserves some reflection amid the joys of Memorial Day Weekend: family barbecues, nature hikes, reading books--and anything else that isn't digitally connected.

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