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How the transition to digital shrank the encyclopedia market

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As you may have noticed from the LivingSocial widget in my right sidebar I am currently reading Chris Anderson’s new book ‘Free’.  The following excerpt from p129-30 describes how the move to digital shrunk the encyclopedia market from $1.2bn to $600m in just three years in the 1990s.  Since then thanks to Wikipedia it has of course got much closer to $0.  As I’ve noted before the transition to digital will have a similar shrinking effect on many other industries.

Josh Kopelman, tells this story of one such example [of the transition to free shrinking industries]:

“My first company, Infonautics, was an online reference and research company targeting students.  While I was there I got a firsthand education on “asymmetrical competition”.  In 1991, when we started, the encyclopedia market was approximately a $1.2bn industry.  The market leader was Britannica – with sales of approximately $650m, they were considered the gold standard of the encyclopedia market.  World Book Encyclopedia was firmly ensconced in second place.  Both Britannica and World Book sold hundreds of thousands of encyclopedia sets a year for over $1,000.

However, in 1993, the industry was permanently changed.  That year Microsoft launched Encarta for $99.  Encarta was initially nothing more than the poorly regarded Funk & Wagnall’s Encyclopedia repackaged on a CD – but Microsoft recognised that changed in technology and production costs allowed them to shift the competitive landscape.  By 1996 Britannica’s sales had dropped to $325m – about half their 1991 levels – and Britannica had laid off its famed door-to-door sales staff.  And by 1996 the encyclopedia market had shrunk to less than $600m.  In that year, Encarta’s U.S. sales were estimated at $100m.

So in just three years, leveraging a disruptive technology (CD-ROM), cost infrastructure (licensed content versus in-house editorial teams), distribution model (retail in computer stores versus a field sales force) and pricing model ($99 versus $1,000), the encyclopedia market was cut in half.  More than half a billion dollars disappeared from the market.  Microsoft turned something that Britannica considered an asset (a door-to-door sales force) into a liability.  While Microsoft made $100m it shrunk the market by over $600m.  For every dollar of revenue Microsoft made, it took away six dollars of revenue from their competitors.  Every dollar of Microsoft’s gain caused an asymmetrical amount of pain in the marketplace.  They made money by shrinking the market.”

And now Wikipedia, which costs nothing, has shrunk the market again, decimating both the printed and the CD-ROM encyclopedia markets.  (In 2009, Microsoft killed Encarata altogether.)

It is interesting to note the speed with which this happened and the extent of the disruption Microsoft brought to bear (technology, cost infrastructure, distribution model, and pricing model).  Similar things are going on in the music, video and print markets where the same four forces of disruption are at work, with I predict similar effects on the size of the markets (as traditionally measured at least – i.e. recorded music sales are declining but the overall music business including concerts, merchandise etc. may well be growing).

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