Choice and Scale - Jaffer Ali - MediaBizBloggers

Our old friend and chief digital cheerleader, Henry Blodget is at it again. In a recent article, he peddled the notion that a merger between AOL and Yahoo! was a "no brainer" because digital scale would finally be achieved through the increase in content choices for audiences.

Oh really?

Conventional wisdom seems to support Mr. Blodget. But as we have experienced so many times in history, more often than not conventional wisdom is just plain wrong. And it is wrong once again.

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OK, let's examine how increased choices actually work AGAINST scale. Take a stroll down the toothpaste aisle of your local drug store. You might find 47 different types of toothpaste. As the SKUs increased, sales per SKU decreased. This is not even controversial.

So what did toothpaste manufacturers do when faced with its competition creating multiple brands for the category? They in turn created multiple brands. Their goal was to increase the aggregate customer base by satisfying ever-smaller niche, consumer audiences.

Consider the state of the television industry in 1965. Three networks dominated the airwaves. Choice was limited. But oh how they scaled. Today, if you have Comcast or Direct TV, you have 600 choices to watch. The audience per channel is pathetically low. Increased viewing choices have not led to increased scale. They have achieved the opposite.

With the Internet, our choices have been increased by several orders of magnitude. The result has been declining scale. I believe it is axiomatic that as choice increases, scale decreases. So on its face, an AOL merger with Yahoo! will not automatically lead to scale and quite likely would exacerbate the growing decline in scale as the choices proliferate.

Think of YouTube, God's gift of overwhelming choice. How many clips actually scale to reach 25 million views? Maybe three clips per month? Maybe three out of how many millions?

To solve issues of scale, we need to move beyond what I call the "Narcissistic Era". We may be slowly emerging from the notion that every audience or consumer idiosyncrasy should be satisfied. As the "one-to-one" mantra took hold, audiences started believing that they were entitled to their own universe.

As the one-to-one narcissism took hold, new "philosophers" rationalized the phenomenon with a new buzz phrase; long-tail marketing. Marketers busied themselves chasing their long tails, and are still reeling from dizziness!

Amidst an environment of plenty from WW II forward, brands rushed in to feed the narcissism. Media rushed in to feed that self-absorption. Increased choice is the ingrained uber meme. And what is the dialectical consequence? A decrease in scale on almost every front.

The answer to this dilemma for many is to achieve scale through aggregating choices (the Blodget way). But a far more existential solution would be to figure a way to limit choice to achieve scale. Walgreens and Wal-Mart may be helping manufacturers. How? Walgreens announced that they were going to eliminate 25% of SKUs in 2010 and then reduce it even more in 2011. They want more sales per item sold. Wal-mart is doing the same.

Amazon has millions of SKUs and of course will sell more than $20 billion worth of merchandise. They recently purchased Woot.com, which sells ONE item per day. The reason for buying Woot? Amazon wanted the vendor relationships that Woot has developed through its focused, volume purchasing, and the deeper margins produced via more unit sales per SKU carried.

In our own e-commerce division ( www.PulseTV.com ), we reduced SKUs from 15,000 to 800 and introduced a daily deal of one item highlighted per day. Margins increased significantly, and so did sales! With our media company, Vidsense, (www.Vidsense.com) we created a video widget that is placed on websites across our network and which limits the viewing choices to a maximum of six. The result? We can now deliver up to 15 million qualified viewers a day to a single destination site with just these six viewing options.

So, if you want to achieve scale in your business model, start thinking of ways where "less is more." Think about Henry Ford laughing all the way to the bank because he had the good sense to paint all of his cars the same color.

Jaffer Ali is the CEO of Vidsense and PulseTV.com. He can be reached atj.ali@Vidsense.comor by phone at 708-478-4500 ext. 105.

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