Monday, December 16, 2013

Spending Money in the Right Places

Sweet - a blog post about corporate resource allocation!  What could be more fun?  A sharp stick in the eye?

Stick with me (hah!) - it actually won't be that painful.

Here's the punchline: Great information businesses spend a minority of their resources on creating content and the majority on distributing that content.

Alas, many info businesses get that backwards.

In an earlier post, we took a deeper dive into the common problems in information businesses.   We talked about how many info businesses are subscale - and allocate resources inappropriately.  Turns out, those two characteristics are closely linked.

First, some definitions: when I say content creation, I mean all the time, money, and effort spent to collect, process, analyze, and package content for customers.

In the TV ratings business, for example, that would include all the data collection on who's watching what, calculating viewership share, creating analytics, etc.  In the consumer credit reporting business, that would include collecting data on who's paying their bills (and who isn't), creating scoring algorithms to segment consumers, reporting tools to allow buyers to access the data, etc.

Content distribution, on the other hand, includes the time, money, and effort spent to market, sell and deliver the content to customers.

In most information businesses, that would include the cost of the salesforce, marketing organization, channel sales costs, and the like.

Here's the key insight: the secret to a scalable information business is to sell the same information over and over again - with little to no marginal product cost.

I know - obvious, right?  Maybe in theory, but not so much in practice.

For example, I looked at a publicly-traded information business in the IT space recently - it's a sizable company with about $200m in annual revenues.  Problem is, it's a break-even business that spends 59% of revenues on content creation.  Tack on another 32% for content distribution costs and add in overhead!  A lousy equation for investors.

(As an aside - that same company has less than $10m of deferred revenue on the balance sheet.  Remember this earlier post about metrics that matter?)

Contrast those metrics with another publicly-traded information business I'm doing a deep dive on right now.  That business is also break-even, making it a questionable investment.  But they're doing some important things right: content creation costs are only about 16% of revenue, while distribution is about 65% of revenue.  As the business scales, it's not unreasonable to think that great leverage could result from the low content creation costs...

Here's my rule of thumb: a mature information services business should spend 20% or less of revenue on content creation, and at least double that on content distribution.  

What's your experience?  Please share in the comments below!