In 1991, Encyclopedia Britannica posted record revenues of $650M. Less than five years later, the famous encyclopedia, once the undisputed repository of all the knowledge in all the world was on the verge of bankruptcy and had to be sold. How had this happened?
First published over two hundred years ago, Encyclopedia Britannica was among the first encyclopedias available in the English-speaking world. It’s claimed that George Washington, Alexander Hamilton and George Washington all owned an Encyclopedia Britannica. Over the next two centuries, it successfully differentiated itself from the rest of the market as the luxury brand with unquestioned trustworthiness. Its contributors “spanned the brightest thinkers of the time and scores of Nobel laureates contributed to various editions”.
From a business perspective, the encyclopedia was highly profitable for its American owners. Each multi-volume set of books sold for approximately $2,000 with production costs–printing, binding, and physical distribution– about $250. The encyclopedia was sold by door-to-door sales representatives, for which they were paid a commission of $500 – $600 per sale. The sales force was considered one of the most talented, aggressive and successful direct sales organizations in all the world.
It was thought that Britannica’s customers were willing to pay the high price commanded by the encyclopedia because they valued the authoritative information contained in the books – much more complete than offered by competitors World Book or Groliers. The customer base consisted mainly of parents who bought the books for their family with hopes that the steep investment could contribute to their children’s education.
Most people credit the rapid rise of popularity of the CD-ROM in the early 1990s as the major contributor for Encyclopedia Britannica’s demise. With the advent of CD-ROM, digital encyclopedias, such as Microsoft Encarta were selling for as little as $50. With the advent of Microsoft’s policy of bundling software with personal computers, many people got Encarta for free. At first, Britannica dismissed the challenge that Encarta and other upstart CD-ROM encyclopedias posed. They viewed CD-ROMs as “nothing more than electronic versions of inferior products.” Then as Britannica’s sales began to drop precipitously from 1992-1994, they finally developed a CD-ROM product of its print version with price point was hated by both the market (too high) and by their sales force (too low). The best salespeople began to leave the company and by 1995, the company’s fate was sealed. With the high cost of maintaining their direct sales force and steep revenue drop of 50% from 1991 to 1996, the company put itself on the market and was finally sold to Swiss financier Jacob Safra for $135 million – pennies on the dollar for what the company was worth just five years earlier.
While it’s easy to place the blame for the demise of Encyclopedia Britannia on the company’s inability to react to the technological disruption caused by the CD-ROM, the real reason is much more complicated.
According to Phillip B. Evans and Thomas S. Wuster of the Boston Consulting Group, Encyclopedia Britannia didn’t fail because of a lack of focus (on the threat of CD-ROM technology), but the company failed because they focused on the wrong threat.
“Britannica’s executives failed to understand what its customers were really buying. Parents had been buying Britannica less for its intellectual content than out of a desire to do the right thing for their children. Today [back in the mid-1990s], when parents want to do the right thing, they buy their kids a computer.”
“The computer, then, is Britannica’s real competitor. And along with the computer came a dozen CD-ROMs, one of which happens to be–as far as the customer is concerned–a more-or-less perfect substitute for the Britannica.”
Britannica’s sudden downfall is more than just another example about how a once-great company got complacent. It highlights the dangers of focusing on the wrong threat at a time when tremendous technological change was occurring. Britannica’s executives made the mistake of confusing the obvious tactical threat [CD-ROM] with the not-so-obvious strategic threat [the family PC].
Today, Encyclopedia Britannica is engaged in another war (this time with Wikipedia), and again, they’re focusing on the wrong threat. While Britannica is pouring resources into trying to convince the public that their product is superior to the one offered by Wikipedia (as measured by a standard of ‘correctable mistakes per 100 articles’), Wikipedia knows that the public doesn’t care about the minor differences in content between the two competitors. Wikipedia is focusing its resources on creating an easy-to-use site that appeals to everyone. That’s where is battle is – getting eyeballs to view your content and Wikipedia is clearly winning. The proof is in the pudding (so to speak). When was the last time when you asked a question, someone told you to ‘Britannica it’? As Britannica flails, Wikipedia has built its estimated market value into the billions.
Here’s the takeaway. Keeping your eye on the ball is worthless if you’re focusing on the wrong ball. During times of rapid and sudden technological change, it makes sense to step back and figure out where the real threat lies.
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