Wednesday, July 27, 2005

No accident that RSS has gone from summary to syndication.

From the Harvard Business Review, circa 2000.

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Syndication

The Emerging Model for Business in the Internet Era

There's no question that the Internet is overturning the old rules about competition and strategy. But what are the new rules? Many of them can be found in the concept of syndication, a way of doing business that has its origins in the entertainment world but is now expanding to define the structure of e-business. As companies enter syndication networks, they'll need to rethink their products, relationships, and even their core capabilities.

BUSINESS EXECUTIVES HAVE A LOT TO LEARN FROM TALK SHOW HOST JERRY SPRINGER - not about resolving conflicts through chairthrowing brawls but about syndication, the ideal way to conduct business in a networked, information-intensive economy.

Syndication involves the sale of the same good to many customers, who then integrate it with other offerings and redistribute it. The practice is routine in the world of entertainment. Production studios syndicate TV programs, such as the Jerry Springer Show, to broadcast networks and local stations. Cartoonists syndicate comic strips to newspapers and magazines. Columnists syndicate articles to various print and on-line outlets. Consumers of entertainment - the people watching the TV shows or reading the newspapers - are generally unaware of the complex, ever-shifting business relationships that play out behind the scenes. But without syndication, the American mass media as we know it would not exist.

Elsewhere in the business world, syndication has been rare. The fixed physical assets and slow-moving information of the industrial economy made it difficult, if not impossible, to create the kind of fluid networks that are essential to syndication. But with the rise of the information economy, that's changing. Flexible business networks are not only becoming possible, they're becoming essential. As a result, syndication is moving from the periphery of business to its center. It is emerging as the fundamental organizing principle for e-business.

Although few of the leading Internet companies use the term "syndication" to describe what they do, it often lies at the heart of their business models. Look at E* Trade. Like other on-line brokerages, E*Trade offers its customers a rich array of information, including financial news, stock quotes, charts, and research. It could develop all this content on its own, but that would be prohibitively expensive and would distract E*Trade from its core business: acquiring and building relationships with on-line customers. Instead, the company purchases most of its content from outside providers- Reuters and TheStreet.com for news, Bridge Information Systems for quotes, BigCharts.com for charts, and so on. These content providers also sell, or syndicate, the same information to many other brokerages. E*Trade distinguishes itself from its competitors not through the information it provides but through the way it packages and prices that information. Just like a television station, it is in the business of aggregating and distributing syndicated content as well as providing other in-house services such as trade execution.

On the Web, unlike in the physical world, syndication is not limited to the distribution of content. Commerce can also be syndicated. One company can, for example, syndicate a shopping-cart ordering and payment system to many e-tailers. Another company can syndicate a logistics platform. Another can syndicate fraud detection and credit-scoring algorithms. Another can syndicate human resource processes. Businesses themselves, in other words, can be created out of syndicated components. The much-discussed "virtual company" can become a reality.

Syndication is a radically different way of structuring business than anything that's come before. It requires entrepreneurs and executives to rethink their strategies and reshape their organizations, to change the way they interact with customers and partner with other entities, and to pioneer new models for collecting revenues and earning profits. Those that best understand the dynamics of syndication - that are able to position themselves in the most lucrative nodes of syndication networks - will be the ones that thrive in the Internet era.

The Three Syndication Roles

Traditionally, companies have connected with one another in simple, linear chains, running from raw-material producers to manufacturers to distributors to retailers. In syndication, the connections between companies proliferate. The network replaces the chain as the organizing model for business relationships. Within a syndication network, there are three roles that businesses can play. Originators create original content. Syndicators package that content for distribution, often integrating it with content from other originators. Distributors deliver the content to customers. A company can play one role in a syndication network, or it can play two or three roles simultaneously. It can also shift from one role to another over time.

Here's a simple example of a syndication network from the media business. Scott Adams, an originator, draws the popular Dilbert cartoon strip. He licenses it to a syndicator, United Features, which packages it with other comic strips and sells them to a variety of print publications. A newspaper, such as the Washington Post, acts as a distributor by printing the syndicated cartoons, together with articles, photographs, television listings, advertisements, and many other pieces of content, and delivering the entire package to the doorsteps of readers.

Now, lets look at how the syndication roles are emerging on the Internet:

Originators. The Internet broadens the originator category in two ways. It expands the scope of original content that can be syndicated, and it makes it easier for any company or individual to disseminate that content globally. Anything that can exist as information- from products and services to business processes to corporate brands-can be syndicated.

A good example of an Internet originator is Inktomi, a start-up that created a powerful Internet search engine using its proprietary technologies for connecting many inexpensive computers to act as a virtual supercomputer. By the time Inktomi was ready to enter the market, other companies such as Yahoo! and Excite already had well-established search engine brands. Inktomi's executives knew that it would be difficult for a new competitor to take them on directly. But the executives also saw that many other large Web sites wanted to offer search engine functionality but didn't have the technology. Rather than sell itself to any one of these companies, Inktomi decided to syndicate its application to all of them. Web sites are able to customize the Inktomi service for their users, offer it under their own brands, and combine it with other functions and content that they develop on their own or purchase from other originators.

Inktomi generates revenues through per-query charges and by sharing the dollars its customers generate from selling banner advertisements on their search pages. The company has applied the same business model and core technologies to other services such as content caching and comparison shopping. Last quarter, it answered 3.4 billion search queries, its quarterly revenues hit $36 million, and its market capitalization surpassed $ 10 billion.

Syndicators. By bringing together content from a variety of sources and making it available through standard formats and contracts, syndicators free distributors from having to find and negotiate with dozens or hundreds of different originators to gather the content they want. In other words, syndicators are a form of infomediary, collecting and packaging digital information in a way that adds value to it. In the physical world, stand-alone syndicators are rare outside the entertainment field, but this business model is becoming increasingly prominent on the Net.

Screaming Media is a leading content syndicator. It collects articles in electronic form from some 400 originators and, using a combination of automated filtering software and human editors, categorizes each article as it flows through its servers. It then delivers to its customers- currently, more than 500 different sites-only the content relevant to their target audience. A site catering to auto-racing enthusiasts, for example, would receive a steady stream of up-to-date racing news and features. The site could license content directly from originators such as the Associated Press, but the vast majority of that content would be irrelevant to its audience. Screaming Media charges monthly fees based on the volume of filtered content its customers desire. It pays some of that money back to the content originators as royalties, allowing everyone involved to benefit from the transaction.

LinkShare is another on-line syndicator, but unlike Screaming Media, it syndicates commerce rather than traditional content. More than 400 online retailers have contracted with LinkShare to administer their affiliate programs-programs that enable other sites to provide links to the e-tailers in return for a small cut of any sales those links generate. LinkShare aggregates all the programs on its own site, providing an easy, one-stop marketplace for affiliate sites. In this network, the e-tailers act as the originators, LinkShare is the syndicator, and the content sites are the distributors. LinkShare also provides the technical infrastructure for monitoring transactions and tracking and paying affiliate commissions, and it offers ancillary services such as reporting for both affiliates and retailers. The e-tailers pay LinkShare a combination of up-front fees and per-sale commissions.

Distributors. Distributors are the customer-facing businesses. They use syndication to lower their costs for acquiring content and to expand the value they provide to consumers. E*Trade is one example of a distributor. Another is Women.com, an on-line destination for women. Women.com's staff creates its own content, which it integrates with syndicated information from partners such as ABC News and Good Housekeeping magazine. Women.com also offers a range of syndicated services, including free Web-based e-mail accounts from WhoWhere, a subsidiary of Lycos, and weather forecasts from AccuWeather. As a distributor, Women.com's role is to organize all this material into a compelling, targeted offering that attracts visitors.

At the same time, Women.com also distributes shopping services syndicated from a variety of partners, including eToys, NeimanMarcus.com, RedEnvelope, and FogDog. Much like a traditional department store, Women.com organizes these on-line retailers' merchandise into relevant categories, such as gifts, clothing, cosmetics, and electronics, and it promotes featured products with pictures and descriptions. There are two important differences from the physical world, however. First, when a customer makes a purchase, she does so through a special hyperlinked connection to the partner site rather than through Women.com. Women.com need not hold inventory, process transactions, or manage fulfillment, but it receives a percentage of each sale for bringing in the customer. Second, distributors have far more flexibility on the Web. If PlanetRx offers Women.com a better commission on cosmetics than Eve.com, or if one set of products sells better than another, Women.com can quickly swap the products it promotes to maximize its revenues. It never has to worry about unsold inventory or a time lag in reconfiguring its supply chain.

From Scarcity to Abundance

Internet syndication opens up endless opportunities for entrepreneurs, and it provides enormous freedom to all companies. It enables businesses to choose where they wish to concentrate their efforts and to piggyback a myriad of other businesses that can handle the remaining elements of a complete end-to-end service. Unlike outsourcing, it does not restrict flexibility. Syndication relationships can change rapidly-by the second, in fact- and companies can quickly shift between different roles. But because syndication networks are so complex, they also present a host of challenges.

For a sense of what business is like in a syndication network, consider the Motley Fool, a popular on-line company that provides financial information to investors. The Motley Fool plays all three syndication roles simultaneously. It originates content, which it uses on its own Web site and on its America Online site, and which it also offers through syndicators like iSyndicate. It acts as a syndicator itself, providing stock-market commentary in various formats to sites such as Yahoo! and the San Jose Mercury News's SiliconValley.com, as well as to 150 print newspapers and 100 radio stations. And it distributes syndicated business stories from news wires such as Reuters and syndicated financial applications from FinanCenter's CalcBuilder.com.

At an operational level, the Motley Fool's business is extremely complicated. The various elements of content that flow between it and its partners are updated according to different schedules and are subject to different business rules governing how material can be used and how payments are distributed. In some cases, the Motley Fool makes money through up-front licensing fees; in other cases, it receives a share of advertising revenue on other sites that run its content; and in still other cases, it takes a share of transaction revenues. Fortunately, however, the content flows, the business rules, and the revenue streams can largely be managed by software. As long as you get the code right, the business runs smoothly.

The bigger challenge lies at the strategic level. Given the unpredictable and ever-changing flows of revenues, profits, and competition on the Web, companies need to choose their place in a syndication network with care, and they need to be adept at reconfiguring their roles and relationships at a moment's notice. The syndicated world of the Web is radically different from the traditional business world, where assets tended to be fixed and roles and relationships stable. To thrive in a syndication network, executives first have to shed many of their old assumptions about business strategy.

In setting strategy, companies have always sought to organize their markets so as to place themselves in the sweet spot of the value chain-the place where most of the profits reside. Traditionally, the way to do that has been to seize upon or create scarcities. Control over a scarce resource is always more valuable than control over a commodity. Procter & Gamble cranks out a constant stream of new products and product extensions because it wants to maximize its control over supermarkets' limited shelf space. Home Depot seeks to crush local hardware stores with broad selection and low prices because it wants to be the only place in town to buy saws and bathroom fixtures. Other companies seek to dominate a source of supply, to patent a product, or to establish control over some other scarce resource.

The Internet, however, replaces scarcity with abundance. Information can be replicated an unlimited number of times. It can be reassembled and recombined in infinite combinations. And it can be distributed everywhere all the time. There are no limits on shelf space on the Net, every store is accessible to every shopper, the lanes of supply and distribution are wide open, and even the tiniest new- company can achieve enormous scale in almost no time. Because the constraints of physical inventory and location don't apply, creating and maintaining scarcities isn't an option.

Instead, successful strategies must be designed to benefit from abundance. Companies need, in other words, to seek out and occupy the most valuable niches in syndication networks-which turn out to be those that maximize the number and strength of the company's connections to other companies and to customers. And because those connections are always changing, even the most successful businesses will rarely be able to stay put for long.

Amazon's Syndication Strategy

The maneuverings of Amazon.com can best be understood through the lens of syndication strategy. Jeff Bezos, Amazon's founder and CEO, quickly established his fledgling company as the leading on-line distributor of books and information about books by capitalizing on the abundance of the Web: his site could offer a dramatically larger selection than any physical bookstore. But since the Web's abundance is open to all comers, that early advantage could not be sustained for long. Other on-line booksellers soon matched Amazon's selection, and consumers began to use shopping bots to compare many merchants' prices instantly. Though Amazon is the largest retailer on the Web, thousands of competitors are always just a click away. If Bezos had simply tried to maintain Amazon's role as a distributor, he would have doomed his company to endless price wars and vanishing margins, no matter how many different products it distributed.

But Amazon hasn't stood still. It has constantly repositioned itself to play different syndication roles. In 1996, for example, it launched an aggressive affiliate program called Amazon.com Associates. Instead of relying solely on attracting customers to its site, Amazon can use this program to take its site to where customers already are. The more than 400,000 sites that have signed up to be affiliates each provide their own visitors with hyperlinks that enable them to make purchases through Amazon. In effect, Amazon is syndicating its store to other locations. While Amazon loses some control over merchandising and has to pay out 5% to 15% commissions on revenues generated by affiliates, the benefits far exceed the costs. Amazon puts itself in front of more potential customers than it could attract directly, especially in niche categories where affiliates provide specialized content and organize product listings for a specific audience. And it turns hundreds of thousands of non-employees into a virtual sales force, which never gets paid until a sale is realized.

More recently, Amazon has taken on a new syndication role. Through its zShops program, it now hosts hundreds of small e-commerce providers on its own site. These shops gain access to Amazon's 13 million customers as well as its sophisticated tools for smoothing the on-line ordering process. In return, they pay Amazon a listing fee for each item, plus a 1.25% to 5% commission on each sale. zShops turns Amazon into a distributor-not of books or other products but of on-line shops. In addition to the revenue boost, Amazon gets additional traffic from customers interested in the niche zShops offerings. Amazon has also started signing distribution deals with larger e-tailers such as Drugstore.com and Living.com, which offer products complementary to its own. Amazon receives substantial payments and equity from these partners in exchange for placement on its site, and it also gives customers fewer reasons to shop elsewhere.

By acting as a syndicator and a distributor of e-commerce, Amazon is turning the absence of scarcity on the Web from a threat to an advantage. The multitude of other sites that users visit are no longer alternatives to Amazon; they are opportunities for Amazon to expand its presence-and its earnings.

Rethinking Core Capabilities

Amazon's experience holds a very important lesson for all companies. In a syndicated world, core capabilities are no longer secrets to protect - they are assets to buy and sell. One of Amazon's most distinctive capabilities is its ordering system. Instead of keeping that system to itself-as traditional strategists might have counseled-Amazon uses syndication to sell the capability to both stores and content sites throughout the Web. Amazon draws the line at direct competitors such as Barnesandnoble.com, which it is suing for infringing on a patent of its ordering system, though even this distinction may ultimately give way as the benefits of syndication multiply. In an economy of scarcity, core capabilities are sources of proprietary advantage. In an economy of abundance, they're your best product. If you try to sequester them, you may gain a short-term competitive edge, but your competitors will soon catch up. If you syndicate them, you can turn those competitors into customers.

In some cases, the syndicated assets themselves may be valuable enough to generate big revenues. But even if they aren't, the other benefits of syndication can be significant. Like Amazon, companies can use syndication to broaden their distribution in an efficient manner. Syndication can also bring companies data about customer usage patterns. And it can generate leads and reinforce brands. All of these are benefits that companies have traditionally sought to derive by dominating their markets and by exercising exclusive control over information. But with competitive advantages increasingly difficult to lock in-thanks to the leveling power of the information economy-syndication provides a superior route to the same benefits.

Think about what Federal Express has done with its package-tracking system. FedEx invested a great deal of money to develop unique technologies and an infrastructure for monitoring the location of every package it handles. This capability gave it an edge on competitors. Now, however, FedEx is syndicating its tracking system in several ways. The company allows customers to access the system through its Web site to check the status of their packages. It provides software tools to its corporate customers that enable them to automate shipping and track packages using their own computer systems. And it allows on-line companies to customize its tracking system, integrate it with their own offerings, and distribute it through their own sites.

Someone who orders flowers through Proflowers.com, for example, can check the delivery status directly on the Proflowers site. Behind the scenes, it's the FedEx application querying the FedEx database, but whereas FedEx just tracks the package, Proflowers also provides information from its own records about what's inside the box and what the sender wrote on the accompanying card. FedEx doesn't charge Proflowers for using its technology; it is, in a very real sense, giving away one of its core capabilities. What does it get in return? Plenty. By integrating its technology with the Proflowers ordering system, it makes it much harder for the customer to switch to a different delivery company. By enabling Proflowers to serve its customers better, it ensures that more packages of flowers will be shipped in FedEx planes and trucks. And by incorporating its brand name on the Proflowers site, it publicizes its services and promotes its brand.

As more and more business turns into e-business, smart managers in every company will find ways to use syndication to do what FedEx has done.

The New Shape of Business

Beyond its impact on individual companies' strategies and relationships, syndication promises to change the nature of business. As organizations begin to be constructed out of components syndicated from many other organizations, the result will be a mesh of relationships with no beginning, end, or center. Companies may look the same as before to their customers, but behind the scenes they will be in constant flux, melding with one another in ever-changing networks. The shift won't happen overnight, and of course there will always be functions and goods that don't lend themselves to syndication. But in those areas where syndication takes hold, companies will become less important than the networks that contain them.

Indeed, individual companies will routinely originate, syndicate, or distribute information without even being aware of all the others participating in the network. A particular originator may, for example, have a relationship with only one syndicator, but through that relationship it will be able to benefit from the contributions of hundreds or even thousands of other companies. While every participant will retain some measure of control-choosing which syndication partners to have direct relationships with and deciding which business rules to incorporate into its syndicated transactions-no participant will control the overall network. Like any highly complex, highly adaptive system, a well-functioning syndication network will be self-organizing, constantly optimizing its behavior in response to an unending stream of information about the transactions taking place among its members.

Syndication may not be a new model, but it takes on a new life thanks to the Interact. Virtually any organization can benefit from syndication, often in several different ways if it's willing to view itself as part of a larger, interconnected world rather than seeking exclusive control at every turn. The tools and intermediaries that facilitate syndication relationships will become more sophisticated over time. Already, though, there are many syndication networks in place and many examples of successful syndication strategies. As the Internet economy continues to grow in importance, syndication will grow along with it as the underlying structure of business.

The Structure of Syndication

Legend for Players
A Originators
B Syndicators
C Distributors
D Consumers

Role

A Create original content
B Package content and manage relationships between originators and
distributors
C Deliver content to consumer
D View or use content; create revenue through fees, purchases, or
viewing ads

Traditional Examples

A Dreamworks
Charles Schulz
Oprah Winfrey

B King World
United Features

C New York Times
CBS
CNN

Web Examples

A Inktomi
Quote.com
Motley Fool

B iSyndicate LinkShare
Motley Fool

C Women.com
Yahoo!
Motley Fool

Everything Changes

Business in a syndicated world bears little resemblance to its industrial predecessor. To succeed, executives need to change the way they think about nearly every aspect of strategy and management.

Legend
A Structure of Relationships
B Corporate Roles
C Value Added
D Strategic Focus
E Role of Corporate Capabilities
F Role of Outsourcing

Traditional Business
A Linear supply-and-demand chains
B Fixed
C Dominated by physical distribution
D Control scarce resources
E Sources of advantage to protect
F Gain efficiency

Syndication
A Loose, weblike networks
B Continually shifting
C Dominated by information manipulation
D Leverage abundance
E Products to sell
F Assemble virtual corporations

By replacing an economy with one of abundance, the Internet will force executives to rethink their strategies. Instead of viewing core capabilities as secrets to protect, they'll need to see them as products to sell.

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By Kevin Werbach

Kevin Werbach is the managing editor of Release 1.0, a monthly report on trends in the Internet, communications, and computing worlds.

Why Syndication Suits the Web

Syndication has traditionally been rare in the business world for three reasons. First, syndication works only with information goods. Because information is never "consumed," infinite numbers of people can use the same information. That's not the case with physical products. If I sell you a car or a watch, I can't turn around and self those same items to someone else. As long as most of the business world was engaged in the production, transport, and sale of physical goods, syndication could exist only on the margins of the economy.

Second, syndication requires modularity. While a syndicated good can have considerable value in and of itself, it does not normally constitute an entire product; it's a piece of a greater whole. Howard Stern's radio show attracts a sizable audience, but it needs to be combined with many other shows to create a station's programming. Dave Barry's columns have lots of dedicated readers, but they need to be combined with many other pieces of content to make a newspaper. In the old, physical economy, modularity was rare. The boundaries between products, supply chains, and companies tended to be dearly demarcated and impermeable.

Third, syndication requires many independent distribution points. There's little to be gained by creating different combinations and configurations of content if there's only one distributor, or if every distributor is controlled by a content creator. Think of Hollywood in its early days. Major movie studios such as MGM and Warner Brothers not only produced firms but also owned the theaters that showed the films. Since a theater owned by Warner Brothers played only Warner Brothers movies, there was little room for syndicators. But when the U.S. government broke up those arrangements in 1948 on antitrust grounds, studios and distributors became independent from theaters. Syndication of entertainment content began to flourish. In most industries, however, there still tend to be limited numbers of distribution outlets, and they often have tight relationships with the companies that create the goods they sell.

With the Interact, information goods, modularity, and fragmented distribution become not only possible trot essential Everything that moves on the Internet takes the form of information. The hyperlinked architecture of the Web is modular by nature. And because anyone can start a Web site, there are literally millions of different distribution points for users, in such an environment, syndication becomes inescapable.

Beyond Outsourcing

On the surface, syndication looks a lot like outsourcing They both involve the use of outsiders to supply a business asset or function. But syndication holds two large advantages over traditional outsourcing. First because syndication deals with information rather than physical resources, a company can syndicate the same goods or services to an almost infinite number of partners without incurring much additional cost. A physical call-center outsourcer, for example, must hire more people, lease more office space, and buy more equipment as it adds customers. But a content or e-commerce originator doesn't have to invest in more people, space; or machinery when it adds another distributor. Software practically scales for free.

The second advantage is that on-line syndication can be automated and standardized in a way that physical outsourcing can't. An important feature of syndication relationships is that business rules, such as usage rights and payment terms, can be passed between companies along with the syndicated asset or service- both take the form of digital code. Moreover, because the Internet is an open system, the rules can be coded in standard formats that can be shared by any company. That allows syndication networks to be created, expanded, and optimized far more quickly than is possible in the physical world.

Syndication provides choices far beyond those that companies had with outsourcing, but the existence of those choices makes a coherent strategy all the more important. Companies should look for relationships that offer the greatest speed and flexibility, but they should also carefully identify the business terms they consider most important. Should you pay an up-front fee for a syndicated search service for your site, or would it make more sense to receive the service for free but let the provider run a banner ad? Should you use a syndicated procurement application from a company that sells the aggregated purchasing data it collects, or should you pay more for an application from a company that won't use your data? The flexibility of the Internet architecture and the limitless creativity of Internet entrepreneurs- means that every company will ,face a multitude of complex choices in structuring relationships. Be prepared.


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Copyright of Harvard Business Review is the property of Harvard Business School Publication Corp. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.
Source: Harvard Business Review, May/Jun2000, Vol. 78 Issue 3, p84, 10p, 3c.
Item Number: 3049547

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