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The Two Best Consultants in the World Warn the Associated Press

The Associated Press is a cooperative. This “non-profit” is owned by 1,500 newspapers. It employs its 3,000 journalists in 97 countries to provide news stories to these newspapers, as well as others in the media, including radio and T.V. stations and web sites. This company has been getting some significant warnings lately about its cost structure.

Many of its customers are struggling in the new media world. Newspapers and radio stations, especially, are suffering from the onslaught of web-based advertising. The first warning has come from its customers, one of the two best consultants. (See “The Two Best Consultants in the World” in the Perspectives on StrategyStreet.com.) More than 100 newspapers have announced plans to cancel their Associated Press subscriptions. By defecting, these 100 customers have told the Associated Press that its value proposition is out of line. The company is asking too high a price for its performance. In response, the company has cut some of its rates.

It has gotten equally ominous warnings from the second of the two best consultants in the world, competition. New competitors are entering underneath its current price umbrella. These new competitors offer competing services at lower prices. (See “New entrants are penetrating the distribution channels of the industry’s leading competitors” in Symptoms and Implications on StategyStreet.com.) CNN has announced that it is starting a wire news service. PA SportsTicker offers stock tables and sports scores at very low prices. GlobalPost is creating a network of international news correspondents with a planned launch in 2009. Several of Ohio’s largest newspapers have formed an organization to pool in-state reporting. All of these entities must have a low cost structure in order to survive under the discounts they must to offer in the marketplace to pull customers away from the Associated Press. (See “Substitute products have grown in importance” in Symptoms and Implications on StrategyStreet.com.)

The Associated Press has to listen to both of these sources of warning. They are telling the company that the cost structure and prices it enjoys today is not sustainable in the current competitive world. The company must examine its cost structure soon to ensure that it is able to create economies of scale to use against these low-end new entrants. Then it needs to re-segment its market to be sure that the benefits it offers each segment are more than worth the price it charges the segment. Finally, it needs to restructure its pricing system so that each customer segment gets good value; that is, performance for price.

Posted 11/13/08

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