For the exclusive use of N. Keita, 2016. CASE: E-522 DATE: 06/20/14 AXEL SPRINGER IN 2014: STRATEGIC LEADERSHIP OF THE DIGITAL MEDIA TRANSFORMATION I will not tire in claiming our share in all existing electronic media and even more in all information systems yet to come. Axel Springer, founder of Axel Springer (Quoted October 1978) INTRODUCTION In 2013, Mathias Dpfner, CEO of the publishing house Axel Springer SE, a premier source of content in Germany, with its popular newspapers and magazines such as Bild and Die Welt, was evaluating the progress of his company's digital transformation. The advent of the digital revolution at the end of the twentieth century had caused an appreciable shift in the publishing industry. Traditional print media players were confronted with major technological advancements and changes in consumer tastes and how news was consumed. Thus, the challenge for Axel Springer was in finding fresh ways to distribute, monetize, and further develop its old product. This had required the firm to re-evaluate and adapt its corporate strategy to most effectively align with the new age. Dpfner had directed Axel Springer to approach this task with a two-stage digital transformation strategy process. Beginning in 2006, the company focused on organic growth and late-stage digital acquisitions. This stage of the strategy process had centered around profitability and the infusion of digitization into the corporate culture. In 2013, the second stage of the strategy process was driven by Dpfner's formulation of the firm's corporate mission to become \"The Leading Digital Publisher\" and his defining the company's business as its branded content and not its distribution channels. With this new strategy, Axel Springer intended to espouse earlystage investments and entrepreneurship and grow revenue through three business models: paid content, marketing, and classified advertising. Jason Luther (MBA 2013), Robert A. Burgelman, Edmund W. Littlefield Professor of Management, and Robert E. Siegel, Lecturer in Organizational Behavior, prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 2014 by the Board of Trustees of the Leland Stanford Junior University. Publicly available cases are distributed through Harvard Business Publishing at hbsp.harvard.edu and The Case Centre at thecasecentre.org; please contact them to order copies and request permission to reproduce materials. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means -- electronic, mechanical, photocopying, recording, or otherwise -- without the permission of the Stanford Graduate School of Business. Every effort has been made to respect copyright and to contact copyright holders as appropriate. If you are a copyright holder and have concerns, please contact the Case Writing Office at cwo@gsb.stanford.edu or write to Case Writing Office, Stanford Graduate School of Business, Knight Management Center, 655 Knight Way, Stanford University, Stanford, CA 94305-5015. This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 2 As of 2013, Dpfner's two-stage digital transformation strategy had been a stunning success. Axel Springer had more than 12,800 employees, total revenues of $3.9 billion, and EBITDA1 of $625 million. The company had exceeded the goals it had set for digital media contributions to revenue and EBITDA, achieved reach in 44 countries, and serviced 98 million unique digital visitors worldwide.2 Looking forward in April 2014, however, it was clear that the future still held many challenges. Dpfner knew that Axel Springer would need to continue to successfully balance digital and traditional media business strategies, further reestablish the firm's identity, and continue to pioneer the cultural transition within the organization. Most importantly, he realized the urgency of preparing his organization for the looming battle between digitally transforming old media content providers (like Axel Springer) and new giant digital technology experts (like Google) transforming themselves into media companies. He also pondered whether it would be possible, and if so how, to mobilize a sufficiently powerful coalition to help the digitally transforming old media content providers in that battle. COMPANY HISTORY: INCEPTION UNTIL THE DIGITAL REVOLUTION Axel Springer's Founding and Imprint Using only 200,000 Reichsmarks (approximately $887), publisher Hinrich Springer and his son Axel Springer (\"Axel\") founded Axel Springer Verlag GmbH (\"Axel Springer\") in Hamburg, Germany, in 1946. Prior to starting the company, Axel had built a career in the media industry, first working for his father as an apprentice compositor and printer at his local newspaper publisher and later acting as a reporter and journalist. In his new role, Axel quickly developed the company's presence and product offering. In 1946, British occupiers granted Axel Springer a license to publish Nordwestdeutsche Hefte, a monthly periodical comprised of transcripts of broadcasts from a popular radio station. This release was immediately followed by the creation of the populist radio and later TV magazine Hrzu. Since many Nordwestdeutsche Hefte subscribers were captured through radio broadcasting, Hrzu served as a complementary offering, helping bolster listener numbers and fuel the periodical's growth. Hrzu immediately became a popular household item and provided Axel Springer with capital for expansion initiatives, including the introduction of the daily evening newspaper Hamburger Abendblatt in 1948. Shortly thereafter, the company created the controversial daily tabloid Bild, with its fusion of provocative pictures and articles about sex, crime, and celebrity gossip. In 1953, the firm acquired the publishing house Die Welt and its national daily and weekly newspaper. By 1959, the company had purchased a majority stake in an additional newspaper and book-publishing business, Ullstein GmbH, and had established itself as a major player in the industry. 1 2 EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization. Source: Axel Springer. This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 3 The Rise of a Political Influence Along with Axel Springer's control of media content and associated power of opinion making came an influential presence in German politics. Axel had been an unwavering member of the conservative social order, a staunch opponent to the East German government. Through this interest, his company emerged as an anti-communist advocate of German reunification, voicing through its newspapers the need for West Germany to respond to East German actions. Axel Springer even went so far as to position its headquarters to overlook the demarcation line (which later became the Berlin Wall in 1961) in the belief that the structure would act as a beacon of freedom against an impending Soviet threat. In 1967, the company furthered its clout by publicly announcing its four guiding principles: the peaceful reunification of Germany; reconciliation of Germans and Jews and support for Israel; rejection of totalitarianism or extremism; and support for a free social market economy. Whereas the second and third views were widely accepted, the first was controversial and the fourth was somewhat ironic. By 1964, Axel Springer's control of market share of daily newspapers, Sunday papers, magazines for young people, and radio and TV listings in Germany had reached 40, 80, 45, and 48 percent, respectively.3 In the late 1960s and early 1970s, West Germany was in a state of unrest. Many, such as the extra-parliamentary opposition, a left-wing group that opposed the conservative values that dominated West Germany, viewed Axel Springer as an obstacle to a policy of dtente with the Eastern bloc. Specifically, its stance on unification contrasted with the common sentiment that East and West Germany would forever be two separate states. This positioned the firm as a symbol for the free West Germany and led to aggressive demonstrations of protest against the company, including arson attacks and the bombing of its Hamburg headquarters in 1972. Expanding its Strategic Position and Competencies Beginning in 1976, Axel Springer broadened its reach to special interest groups with its targeted magazines for women and its portfolio of sports, photography, and international art publications. Auto Bild, an automobile magazine featuring reviews, how-tos and specific advice, began circulating in Italy in 1986, later extending to 20 European countries, Indonesia, and Thailand. By the mid-1980s, the company had a presence in satellite television, cable TV, and radio. Axel Springer went public in August 1985 shortly before its founder's death in September of the same year. Upon his passing, the CEO transitioned the company's responsibilities to several existing supervisory board members and his fifth wife Friede Springer, who was never active in the operating management, but is a member of the supervisory board. Over the next two decades, the management team grew the firm's positions in products ranging from Internet access services and digital television to magazines and book publishing. The former was a result 3 \"Axel Springer Verlag AG History,\" Funding Universe, http://www.fundinguniverse.com/company-histories/axelspringer-verlag-ag-history/ (accessed April 22, 2014). This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 4 of the advent of major technological and market changes in the media industry and the onset of the Digital Age.4 (A timeline of Axel Springer from 1946-1986 is provided in Exhibit 1.) THE DIGITAL REVOLUTION At the end of the twentieth century, developed economies experienced a transition from analog, mechanical, and electronic technologies derived from the Industrial Revolution to digital technologies and information computerization. The evolution was triggered predominately by the proliferation of personal computers, cellular phones, the Internet, broadband deployment, and changing consumer tastes. This shift markedly affected media distribution strategies as it became possible to remotely access information and display data across a myriad of different mediums. Key Driving Forces Major Technological Change Computers reached double-digit penetration in U.S. households during the 1980s and were present in over one out of every three homes by 1997. This growth provided the framework for the digital revolution and the structure upon which the Internet quickly spread during the late 1990s. Software applications such as Mosaic and Netscape Navigator became prominent and increased usability by allowing consumers to retrieve, present, and traverse resources on the platform. In 2001, over one-half of the U.S. used the Internet, and by 2005 it had reached over one billion users globally. (See Exhibit 2 and Exhibit 3 for household computer penetration in the U.S. from 1984-2012 and global Internet penetration from 1995-2014, respectively.) This sensation was followed by the introduction of cellular phones and other mobile technologies. Specifically, the development of the smartphone, which fused the functionality of a cellular phone with the features of personal digital assistants, media players, digital cameras, and navigation units, bolstered the appearance of media on digital platforms. One such device was Apple's iPhone, released in 2007, which quickly became a consumer staple. Apple continued to play a pivotal role in the transformational impact technology had on the publishing industry with the introduction of the \"App Store\" in 2008 and the iPad in 2010. Google's strategy of making the Android mobile operating system freely available also turbocharged the development and adoption of smartphones. Over time, these devices became ubiquitous, furthering the reach of digital platforms for content distribution. (See Exhibit 4 for global device penetration of personal computers, smartphones, and tablets.) Changes in How News Was Consumed Technological changes brought a structural shift in how users consumed news. Beginning in the late 1990s and in the early 2000s, consumers increasingly began getting news from free online sites such as cnn.com and abcnews.com in the United States, as well as popular international sources such as FT.com. As the decade ended and the 2010s started, mobile devices became increasingly important for consuming media. Applications such as Flipboard, Prismatic, and 4 The Digital Age was a period beginning in the late twentieth century characterized by the rise of computerization and information-based industries. This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 5 Zite provided one-stop, dynamic, and colorful digital interfaces to read traditional, newsstandstyle magazines on phones and tablets. As these applications evolved, some could integrate with a user's preferences and social media profiles to develop recommendation engines and personalize the reading experience. Many offerings enabled a user to share stories, follow what their friends were reading, and track articles from certain writers. Market and Consumer Taste Changes The speed with which the new world worked meant consumers required news headlines that were concise and contained only the necessary information. Users also wanted interactive tools to customize or manipulate online content, such as charts or graphs, to arrive at the information they felt was most relevant. With the growing popularity of Facebook, Twitter, Linkedin, and other online forums, news became a communal experience, allowing readers to comment on articles and discuss the news content delivered in a publication. Consumers thus became participating parties in the process of online news creation and distribution. Effect on the Publishing Industry Technology had hit the publishing industry far earlier than the 2000s. Ulrich Schmitz, CTO of Axel Springer's Electronic Media Division elaborated: When you talk to those in the print industry, they will say that there were a lot of technological changes in the 1980s and 1990s that had an impact more on the process and less on the product side. Now, it's different. Everything from the business model to the product itself has been touched by digitization. So the digital product looks different than the classical product. I don't know how many other industries can say that they have been affected in such a dramatic way.5 Prior to the digital revolution, the majority of publishers operated under the same business model. These companies generated editorial content, aggregated reach, and monetized through sales, advertising, and classified revenues. In this scheme, journalists had an unspoken monopoly on content creation, but that changed with the onset of the Internet. Websites like Wikipedia, which aggregated user-generated content and provided a broader offering than traditional publishing did, gained traction. One-click buying technology similar to that used by Apple's iTunes also made online media monetization more realistic. Moreover, in the old model content creators controlled their distribution channels. With the proliferation of the digital revolution, these two functions diverged, as old world publishers and newly formed online distributers now often held opposing interests. This, in turn, created an Internet environment fraught with free content and disconnects between those actually creating content and those receiving payment for the products and services. Websites like the Huffington Post could aggregate and monetize news stories produced by other publications without having to source the information themselves. Other offerings, such as 5 Interview with Ulrich Schmitz, April 15, 2014. Subsequent quotations are from the authors' interview unless otherwise noted. This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 6 YouTube, could use clips from TV shows, movies, and other media to generate profits. Large technology giants, such as Google and Apple, helped users find news platforms that were once monopolized by the old world publishers. Ironically, this period of creative destruction meant that while the Internet expanded the available audience for media and branded content, it severally hampered the overall market for its monetization. Thus, the new challenge for a publisher was in finding new ways to distribute and profit from its old product. (See Exhibits 5 and 6 for the publishing industry's business model before and after the digital revolution.) Industry Responses The steady decline in paper media viewership and its associated drop in advertising revenue in the first decade of the twenty-first century was felt industry-wide. Some print publishers were forced out of their print operations business while others, such as the Tribune Company, the Philadelphia Daily News, the Chicago Sun-Times, and The Columbian newspaper in Vancouver filed for bankruptcy. In an attempt to survive in the changing environment, many newspapers conducted layoffs, partnered with other papers, discontinued features or sections, or reduced circulation to only the publication's more popular days of the week. To maintain its print subscriber base, some publications, like The Los Angeles Times, offered free or discounted digital access to those who had subscriptions to its print circulation. While these efforts helped stymie some of the profit erosion from reduced print frequency, advertising revenue from digital failed to cover the associated losses from print (see Exhibit 7). This created revenue challenges for every player in the industry. One prestigious publishing house laid waste by the digital revolution was the New York Times. In 2000, the company had revenues of $3.5 billion and operating profits of $635 million. By 2013, these figures had reduced to $1.6 billion and $158 million, respectively. Much of this demise was due to management's failure to embrace the changing landscape and insistence on continued investment in print. Between the early 1990s and mid-2000s, the company spent approximately $2 billion on assets that ultimately resulted in failure. For example, the publisher purchased the Boston Globe for $1.1 billion in 1993 and the Worcester Telegram for $296 million in 1999, later unloading them both for a total of $70 million in 2013. Another company that faced the pressures of the evolving landscape was the multinational mass media company News Corporation (\"News Corp.\"). Unlike smaller, less well-capitalized firms, News Corp. was able to weather this shift by implementing an inorganic digital transformation strategy. In particular, News Corp. bolstered its portfolio in 2007 with the purchase of The Wall Street Journal's publishing firm Dow Jones & Company. Subsequently, the company transitioned its 20th Century Fox and Fox News channels to a subscription based model. Like many other publishers, News Corp also moved its newspaper websites, including The Times and The Australian behind pay walls in 2010 and 2011, respectively. By February 2013, The Times and Sunday Times had 153,000 digital subscribers paying between $3.33 and $10 per week.6 6 Ryan Chittum, \"Murdoch's Hard-Paywall Success,\" Columbia Journalism http://www.cjr.org/the_audit/murdochs_hard-paywall_success.ph (accessed May 20, 2014). Review, This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 7 In 2013, News Corp. continued to use acquisitions to fuel its shift into digital services by purchasing the Dublin-based startup Storyful for $25 million. This company helped content distributors detect trends and source, verify, and distribute news content by monitoring social media platforms such as Twitter.7 The South African media company Naspers also found ways to thrive during this challenging time. In the early 1980s, the firm began its transformation to digital with its creation of the subscription television service M-Net. This was followed by an initiative to become one of South Africa's earliest Internet service providers. Naspers acquired a myriad of web-based companies, predominately in fast-growing economies, including a $32 million purchase of approximately 50 percent of China's most popular Internet messaging service Tencent. By 2014, the firm held stakes in online auction businesses, price comparison sites, and e-commerce firms and, with revenues of $6 billion and a market capitalization of approximately $47 billion, was the largest Internet company outside the U.S. and China. A LIGHTHOUSE OF CHANGE: MATHIAS DPFNER Mathias Dpfner became Chairman and CEO of Axel Springer in January 2002, having previously worked as the editor-in-chief of Wochenpost, Hamburger Morgenpost, and Die Welt. At age 39, Dpfner's appointment was controversial. He was considered by some to be too young and many thought that his background in Musicology and German and Theatrical Arts made him ill-equipped for the position. Moreover, within the last decade, Axel Springer's executive board had been a proverbial turnstile of talent, and the market viewed Dpfner as one of many executives to begin yet another temporary stay in power. This earlier period of steady executive turnover resulted in ever-changing and unclear strategies within the organization. Each entering director or executive brought a new voice, managerial style, and vision for Axel Springer. Dpfner vowed to break this trend and give the organization a single identity and clear purpose. From the beginning, his message was clear: Axel Springer would be the winner of digitalization in the European media business. Dpfner Eyes Online Channels In January 2006, Axel Springer attempted to acquire Germany's biggest television broadcaster, ProSiebenSat.1 for a reported $3 billion.8 Soon thereafter, the German antitrust body blocked the transaction, claiming that the combination would afford Axel Springer with too much market control and power over public opinion. This led management to reconsider its digital strategy and turbocharged its need to find other avenues to distribute its content. Dpfner turned his sights to online channels, challenging the company to have 50 percent of its revenue and EBITDA generated from digital products within the next 10 years. These were bold statements 7 Amol Sharma and Ben Fox Rubin, \"News Corp Makes Social-Media Push,\" The Wall Street Journal, December 20, 2013, http://online.wsj.com/news/articles/SB10001424052702304866904579270043818215428 (accessed May 20, 2014). 8 \"Axel Springer Merger Rejected in Germany,\" The New York Times, January 23, 2006, http://www.nytimes.com/2006/01/23/business/worldbusiness/23iht-springer.html (accessed April 30, 2014). This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 8 from the leader of a very much internally-focused organization that, at the time, produced one percent of its revenues from digital media. Three Key Success Factors To develop a strategy and execute on his vision, Dpfner relied on a close-knit team of internal executives who knew Axel Springer's business by heart. Since these executives would eventually be the change agents within the organization, the CEO believed that this approach would create a streamlined decision-making and implementation process. Moreover, Dpfner believed that Axel Springer should only follow a strategy of digital activities within a framework of the business' three core competencies: creating the best possible journalism and capturing subscribers; knowing how to turn brands and reach into advertising; and monetizing the classifieds marketplace. In carrying out this plan, Dpfner focused on three key success factors: not fearing selfcannibalization from the paper to digital divisions, accepting diverse and entrepreneurial personalities, and not allowing silos. In regard to the latter, Dpfner wanted to ensure that digital activities would not be done at distance from the company's traditional print functions. He believed that if he allowed that dynamic to occur, it would create losers and winners within the organization. The CEO explained: The problem at the beginning was that the structure of the organization was around 90 percent losers (i.e., print) and around ten percent winners (i.e., digital). Thus, the losers were positioned to reject and overpower the transformation simply because there were more of them. So I said: \"We have to create joint responsibilities to induce buy in from the print side.\"9 In one of his first crucial decisions, Dpfner assigned Kai Diekmann, editor-in-chief of Axel Springer's print Bild division, to oversee both the online and offline distribution channels. FIRST STAGE OF STRATEGIC DIGITAL OVERHAUL: 2006-2012 Integrating Bild and Bild.de Bild had been one of Axel Springer's most important and controversial brands since its inception in 1952. With its fusion of provocative pictures and articles about sex, crime, and celebrity gossip, the publication quickly became Europe's best selling tabloid. By 1985, the newspaper had reached a daily circulation of five million and readership of over 12 million.10 This consistent success led to a series of sub-offerings under the parent product line, including the magazine brand family Bild der Frau and Auto Bild, the Sunday newspaper Bild am Sonntag, the 9 Interview with Mathias Dpfner, April 16, 2014. Subsequent quotations are from the authors' interview unless otherwise noted. 10 William Tuohy, \"Paper Keeps It Lively: Germany's Bild Feared, Attacked,\" LA Times, November 19, 1985, http://articles.latimes.com/1985-11-19/news/mn-7491_1_west-germany (accessed April 28, 2014). This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 9 mobile news portal Bildmobil, and the online news portal Bild.de. Each of these channels was the market leader in its space in Germany as of 2014. Prior to 2008, Bild's offline (Bild) and online (Bild.de) segments were separate and distinct. Bild.de was a joint venture between Axel Springer and Deutsche Telekom, with the companies owning approximately two-thirds and one-third of the enterprise, respectively. Much to the displeasure of Bild's editor-in-chief, this meant that the offline division had little influence over the content placed on Bild.de. At the time, Bild.de was heavily used for commercialization and had little reach in the consumer content space. Axel Springer's management intentionally designed Bild.de's growth in this manner. The premise was that for over 50 years Bild had become accustomed to a legacy print product and the immediate injection of a digital presence would be too much of a shock to the system. Donata Hopfen, managing director of Bild explains: I'm often asked the question: \"How did Bild become so successful?\" The answer is that we built a subsidiary under the core brand that was set aside and had different corporate rules. When launched, Bild.de even had its own telephone numbers and buildings. This gave it the chance to cultivate its own DNA and independent corporate culture and resulted in it attracting new and younger talent. Once successful, Bild.de was moved back to Axel Springer/Bild headquarters and was integrated into the core brand.11 In 2007, management agreed to purchase Bild.de and in 2008 the online firm became 100 percent owned by Axel Springer. Going forward, Dpfner believed that the best way to promote digitalization within the organization would be to organize all areas (content, brands, services, etc) in such a way that managers had multimedia responsibility. By assigning Kai Diekmann, the editor-in-chief of Bild's paper division, to both the offline and online distribution channels, the direction and attitude changed from the top. This editor now claimed digital growth as his success and did everything he could in the paper version of Bild to push its accompanying digital content. By December 2009, Bild.de had become the market leader by reach. Idealo: The Initial Investment in the Digital Transformation Strategy Between 2006 and 2012, Axel Springer's business model centered around profitability and the infusion of digitization into the corporate culture. Recognizing that the company's strength was in content and not technology, Dpfner intended to achieve this vision through organic growth and late-stage investments. The CEO's aim was not to assume complete control of these digital entities, but rather to provide them with a toolbox of resources, such as content, cross promotion, technology, advertising, capital for acquisitions, and an international sales infrastructure and allow them to choose which ones to use to meet their needs. (Axel Springer's corporate strategy from 2001-2013 is provided in Exhibit 8.) 11 Interview with Donata Hopfen, April 17, 2014. Subsequent quotations are from the authors' interview unless otherwise noted. This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 10 Axel Springer executed its first investment in the digital industry by acquiring a 74.9 percent stake in the online price comparison platform Idealo in 2006. At the time, the company had 22 full-time employees, achieved 8 million per year in revenue, and held the number five position in its space. The platform supported over 100,000 products and more than 4,300 dealers. Under the arrangement, the company's founders would retain ownership in the organization. Idealo would be the company's first attempt at infusing a new mentality within the traditional publisher and represented an important milestone in the firm's transformation. Dpfner knew that for his digitalization vision to materialize, it was crucial that this initiative be successful. Many at Axel Springer had yet to buy-in to the CEO's change initiative and these initial moves must be champions of the culture Dpfner wanted prevalent in the organization. Navigating the Shrinking Offline Classifieds Market One of the first industry disruptions was in the classified ads' space, where papers began losing market share to digital providers. With Internet ads, users could upload pictures and dynamically refresh their listings and advertisers could track in real-time the returns on their investments. Axel Springer, however, vowed to remain active in this market due to its predictability and high margins. Since the key to maintaining market share was contingent primarily upon strong resources and local sales channels, incumbent firms could often defend their positions. Axel Springer's digital classifieds initiatives were initially met with much infighting. The offline version charged more per advertisement than the online version did and customers consequently dumped the paper product in favor of its digital counterpart. Jens Mffelmann, head of Axel Springer's Electronic Media Division commented: At that time we had the organization against us. When we started the classifieds transformation, we earned 50 per real estate advertisement and were trying to supplant that with 6 per advertisement on the online offering. We would tell real estate agents: \"look, you can get the same advertisement for one-tenth of the price with the digital version.\" The print department was incredibly resentful of this self-cannibalization and it created fierce battles within the firm. Fortunately, Dpfner spearheaded the process and helped the movement push forward.12 In March 2012, Axel Springer created a joint venture with the global private equity firm General Atlantic LLC in an effort to develop the company's classifieds segment into a leading international player. This new venture would hold Axel Springer's digital classifieds business, including its French real estate portal SeLoger, German real estate portal Immonet, and the panEuropean job portal StepStone. The resulting entity would be called Axel Springer Digital Classifieds, of which Axel Springer would own 70 percent. Through this arrangement, Axel Springer intended to leverage General Atlantic as a co-investor and experienced global investor. 12 Interview with Jens Mffelmann, April 15, 2014. Subsequent quotations are from the authors' interview unless otherwise noted. This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 11 Aligning Strategy and Human Capital One result of the acquisition strategy was a cultural clash from the integration of two disparate groups of people: the old school paper publishers and the new generation digital entrepreneurs. The traditional publishing business was extremely fast-paced and efficient but highly inflexible. Over decades, this segment had developed a set of procedures, systems, and processes to optimize the development of a single, paper product every day. Thus, the key challenge for a leader in the industry was to manage to the status quo. With the digital transformation, this group was faced with re-inventing itself in terms of products and development cycles. Managers needed to be more dynamic, agile, and accepting of product changes, an environment that was completely new to legacy Axel Springer employees. The mentality ingrained in a digital company was quite the opposite. Management in these firms wanted autonomy and different management styles, working environments, and ways of communication. This new world tended to be far less hierarchical and much younger in age than its old-world counterparts. Thus, inciting knowledge transfer and cohesiveness between the two mindsets in the organization was extremely difficult. If it were not careful, Axel Springer would become a schizophrenic organization. Shaping the Mindsets of Legacy Employees One way in which Axel Springer attempted to bridge this gap was by helping legacy employees develop, refocus, and build the competencies needed in the new world. The company began by implementing new leadership principles that laid the framework for what it expected from its managers. These new principles included focusing on the employee, providing freedom for staff to develop and shape new ideas, and opening to change. Axel Springer ran over 50 workshops, with each manager in the company participating in at least one course focused on skills development. The firm implemented a mandatory three-day program for top-tier management. Putting these initiatives in front of all management levels, including central functions such as human resources, controlling, and legal, helped send a strong signal to the organization and triggered momentum within the leadership ranks. The executive team also implemented feedback programs in which managers asked their direct reports for assessments on their leadership styles and areas of improvement. Hiring into the Digital Culture Another way of ingraining the digital mentality into the heritage culture was to hire young, Internet-minded talent into the organization. For example, one symbolic new hire was Stephanie Caspar, the managing director of Die Welt. Before she was brought into Axel Springer, she had founded and managed an online shoe shop. Unlike her predecessor, who was a prototypical print manager, she had no newspaper or media industry experience. Promoting Knowledge Transfer Facilitating knowledge transfer was an additional way of bridging the gap between the two factions. Axel Springer organized networking events and lecture series, such as \"Digital Campus,\" where all of the firm's digital companies would present themselves to anyone This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 12 interested in attending. These were often one or two hour talks in the evening and were usually attended by over one hundred employees. SILICON VALLEY: A CATALYST FOR FURTHER REFINING STRATEGIC LEADERSHIP In May 2012, Dpfner approached Kai Diekmann, editor-in-chief of Axel Springer's most important brand, Bild. The CEO had become intrigued with the U.S.' Silicon Valley and how it consistently groomed high-functioning and successful organizations. Wanting to know why the region was such an effective incubator for achievement, Dpfner asked Diekmann to accompany Peter Wrtenberger, CMO of Axel Springer, and Martin Sinner, founder and managing director of Idealo, on a fact-finding mission to the area to develop new entrepreneurial ideas for digital growth. In their absences, each manager's day-to-day responsibilities would be undertaken by co-managing directors or direct reports. A minimum period of six months was set for the visit. Initial Findings The trio arrived in Silicon Valley in September 2012 and immediately began building relationships with and learning from thought leaders. They focused on understanding the technologies, trends, cultures, and conditions that made innovation in companies possible. They found that professionals in the region viewed risk taking and failure differently than those in Germany did and that entrepreneurs embraced technology, rather than feared it. They were also introduced to less hierarchical start-up cultures with more fluid communications, and that were trying to avoid creating the decision hurdles prevalent in bulky, bureaucratic, and traditional corporations. Moreover, they realized that media technology in Silicon Valley was two to three years ahead of that in Germany and that the publishing industry was moving toward digital faster than the company had expected. Knowing that Axel Springer must press ahead with digitization more vigorously, the team sought to convince management that a business model change was needed and, in effect, shatter the confidence of the company that it would be able to maintain the status quo and succeed. Dpfner aimed to achieve this through a three-day management summit hosted in Silicon Valley and attended by over 70 top executives of the company. Kai Diekmann, editorin-chief of Bild, commented: After experiencing Silicon Valley's start-up culture, hierarchies, streamlined forms of communication, and modest corporate behavior, we realized we needed to give the summit a motto\"Leaving the Comfort Zone.\" Everyone, including the complete executive board, flew to the U.S. in economy class and we lodged employees in the less ritzy Tenderloin district in San Francisco. In the beginning there was much protest, but after better understanding Silicon Valley's publishing industry, people understood the need for the reality check. Axel Springer's current business model would not survive what the future held.13 13 Interview with Kai Diekmann, April 15, 2014. Subsequent quotations are from the authors' interview unless otherwise noted. This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 13 Ten months after embarking on their trip, the team returned to Germany, ready to transition Axel Springer from a traditional publisher into a thriving ecosystem of entrepreneurship. SECOND STAGE OF STRATEGIC DIGITAL OVERHAUL: 2013-BEYOND In crafting this second stage of digital growth, Dpfner, as noted before, formulated Axel Springer's corporate mission to become \"The Leading Digital Publisher\" and defined the company's business as its branded content and not its distribution channels. He also wanted to expand the focus of Axel Springer on early-stage investments and entrepreneurship, and generate revenue through three business models: paid content, marketing, and classified advertising. (See Exhibit 9 for Axel Springer's new strategy.) Another Try at Early-Stage Investing Beginning in 2011, the company adopted a three-stage approach to early-stage investing and business development: build, acquire, or partner. One driver of this interest was a desire to imbue the firm's culture with innovation by providing visibility into up-and-coming trends and entrepreneurial cultures. The executive team knew that aside from the industry's transition to digital, they needed to stay apprised of how other online companies, start-ups, and new concepts could disrupt Axel Springer's business model in the future. Building into Paid Models: Bild Plus Many of the firm's early-stage investments were in internal initiatives arising from existing divisions within the organization. For example, until 2013 Bild.de was free. Several months earlier, the firm had decided to purchase a four-year contract for the online rights to the 90second to six-minute highlight clips for each game in the Bundesliga.14 Using this as a starting point in June 2013, Bild introduced Bild Plus, which allowed consumers to access certain content (such as the highlight clips) for a subscription fee ranging from 4.99 to 14.99 per month. Whereas some were concerned about the trade-off between product reach and a digital pay model, the offering achieved excellent results. By May 2014, Bild Plus had over 200,000 paying consumers and had converted 1.1 percent15 of free online users into paying subscribers. Since Bild Plus included both Bild's print and online components, another advantage of this strategy was to expunge the idea of online versus print in the organization. Axel Springer was therefore able to rally the entire team behind the idea of paid content. (Bild's history is provided in Exhibit 10.) Acquiring Complementary Offerings: kaufDA In March 2011, Axel Springer purchased a 74.9 percent interest in kaufDA, a website that enabled users to search for coupon and promotion deals in their immediate area. This offering provided a simple to use central marketplace for retail shopping and helped replace the need for cumbersome promotional print catalogues. Retailers also heavily favored kaufDA's cost per 14 The Bundesliga was the premier professional soccer league in Germany and was one of the most highly regarded and most popular leagues worldwide. 15 For context, the NY Times conversion rate was roughly 0.7 percent. Source: Axel Springer. This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 14 click revenue scheme. Since companies theoretically paid only for marketing to those likely to make a purchase, they were more effectively utilizing their advertising spend. This was preferable to print advertising, where it was much more difficult to associate advertising to sales. Part of Axel Springer's allure to kaufDA was the acquirer's focus on allowing its partners to retain their autonomy. Axel Springer trusted its entrepreneurs to have the best execution and strategic mindset to develop their businesses further and made sure not to disrupt the culture and dynamic that made the startups successful in the first place. This was present in Axel Springer's insistence that the founding team remain shareholders in its company. Moreover, as part of the acquisition agreement, kaufDA retained full control over its sales and marketing functions. In addition, Axel Springer's relationships, Bild brand, and history of trust and credibility provided kaufDA with access to retailers that were previously unobtainable. Reflecting on this value add, 28-year-old Christian Gaiser, CEO of kaufDA, said: The first thing we made sure to do as part of the acquisition was meet the person in charge of all of Axel Springer's retail accounts, Peter Mller. Mller had been doing this for over 20 years, had a vast revenue pipeline, and was one of the last traditional and well-connected salespeople in Germany. Immediately, we got him involved as an advisor. Because of his top access with high-level retailers he opened doors for us that were previously closed.16 Axel Springer could also provide strong advice on international expansion by mentoring the young company on areas such as recruiting, building partnerships, and understanding local cultures. Perhaps the biggest benefit for kaufDA was in learning how the internal decisionmaking processes in large organizations worked and how best to navigate it to reach those with the power and influence to make purchasing decisions. Axel Springer often helped the start-up process its workflow and shielded it from uninteresting leads that could potentially overrun the young organization. This helped kaufDA leverage upside while limiting downside. Partnering to Meet Innovation: Axel Springer Plug and Play In 2013, Axel Springer partnered with \"Plug and Play Tech Center\" in Sunnyvale, California, to create a Berlin-based accelerator for digital entrepreneurs called Axel Springer Plug and Play. The three-month program provided office space, 25,000, networking with Axel Springer and Plug and Play Tech Center leadership, workshops, and mentor opportunities. Axel Springer Plug and Play ran three programs per year. This initiative provided Axel Springer with insights into new technologies, connections with upand-coming talent, and interesting investment opportunities. Plug and Play created an environment where start-up CEOs and Axel Springer executives learned from each other and worked together side by side. This was crucial for refreshing the mindsets of Axel Springer's managers. Jrg Rheinboldt, CEO of Axel Springer Plug and Play, explained: 16 Interview with Christian Gaiser, April 16, 2014. Subsequent quotations are from the authors' interview unless otherwise noted. This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 15 It's important for Axel Springer to be \"infected\" by the attitude of how start-ups make decisions. On a weekly basis these young companies make consequential, binding choices that, if they are wrong, have a lasting impact on the company's future success. A larger company like ours rarely faces these nodes where you really learn how accountability and responsibility work. This initiative helps us be aware of our degrees of freedom.17 Optimizing Bild's Workflow Perhaps the most important decision to ensuring success as a digital brand was the changing of Bild's workflow structure. The company began this process by inviting employees from Bild's management team to visit Silicon Valley to take the time to understand Diekmann, Wrtenberger, and Sinner's findings and create a process for change management. Like the travelers before them, this group quickly realized that the audience on the paper side was declining and that the younger generations were met through digital platforms and not through local magazine kiosks. Prior to 2013, Bild was governed by a \"top-down\" process. The editor-in-chief of Bild decided the content of all of the publication's pages to ensure that the reading was fluid and conveyed a consistent tone. This practice no longer applied to the online media realm, where stories were written as they happened and daily or weekly deadlines were obsolete. To resolve this issue, Bild instituted a \"bottom-up\" process. Every department within the organization became a minipublishing unit responsible for its own social media, content, and paper design. As a result, Diekmann was further removed from the decision-making process and the editors-in-chief of each division became directly responsibility for their divisions' business lines. Selling Off Legacy Assets In July 2013, Axel Springer announced that it had sold several of its strongest traditional print media products to the German media group Funke Mediengruppe. The transaction included the newspaper Hamburger Abendblatt, the television program guide, Hrzu, and the Berliner Morgenpost. This portfolio generated revenues of 512.4 million and accounted for 15 percent of the company's total sales in 2012. Axel Springer would receive 920 million ($1.2 billion) for the divestiture, equating to a sales multiple of roughly 10 times EBITDA.18 Dpfner intended to use these proceeds to invest in its digital publications, including its efforts to help strengthen the online presence of its two main publications, Bild and Die Welt. Selling off heritage assets was received with mixed reviews by the market, with some accusing Dpfner of betraying Axel Springer's roots in journalism and its longstanding legacy. Even within the organization, employees were concerned that this action conveyed indifference toward 17 Interview with Jrg Rheinboldt, April 16, 2014. Subsequent quotations are from the authors' interview unless otherwise noted. 18 Robert Budden, \"Axel Springer Shares Climb 17% After Regional Titles Disposal,\" Financial Times, July 25, 2013, http://www.ft.com/intl/cms/s/0/9008d4ee-f54c-11e2-b4f8-00144feabdc0.html#axzz30WrtOioa (accessed April 30, 2014). This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 16 staff and directly opposed the founder's vision. The heiress of the media company, Friede Springer, disagreed, publicly stating that \"The old has passed away\" and that the publisher needed to evolve in order not to lose its economic strength.19 EVALUATING THE CHALLENGES OF THE FUTURE As of 2013, the company had exceeded the goals Dpfner had set out a decade earlier as digital media contributed 70 percent of the company's advertising revenue and 61.8 percent of its EBITDA. Axel Springer's reach had also grown to support activities in 44 countries and service 98 million unique digital visitors. (See Exhibit 11, Exhibit 12, and Exhibit 13 for Axel Springer's segment revenues, EBITDA, and digital portfolio by business line, respectively.) 20 Regardless of this success, Dpfner could not afford to rest on his laurels. The CEO commented: In business, I work under the rule of only the paranoid survive. I try to take into account the things that can go terribly wrong to avoid negative surprises. To do this, I have this kind of self-criticism. I have this constant impatience, insecurity, and need to question if everything is right. In a way, I think this keeps me down to earth and exacting; because if you are too self-confident, you lose preciseness. Operating under this mentality, Dpfner saw several challenges in Axel Springer's future. Old Media Content vs. New Media Technology Experts In August 2013, Amazon.com purchased The Washington Post Company for $250 million. Dpfner believed that this event delineated the battle lines in a new fight between two players in branded content: old media content and new media technology experts. Those in the first group wanted to discover new technology and enter into new platforms to be successful in the digital world. The latter group, comprised of companies such as Amazon.com, Apple, and Google, sought to become digital content distributers and had the digital infrastructure in place to do so. Fighting for Fair Search and Fair Share Dpfner feared that Axel Springer would ultimately compete with the free-content culture created by these large technology companies. Whereas he believed that branded content would never lose its appeal to society, he acknowledged that monetizing it in an evolving landscape might be difficult and that this would pose a complex structural challenge for the media industry. The CEO was especially concerned about Google and its tremendous global power and dominance over the digital world. In April 2014, Dpfner issued a written answer in the Frankfurter Allgemeine Zeitung21 to Eric Schmidt, Google's executive chairman, in response to 19 Inge Kloepfer, \"The Control Activist Friede Springer\" Frankfurter Allgemeine Zeitung, July 28, 2013, http://www.faz.net/aktuell/wirtschaft/menschen-wirtschaft/zukunft-der-zeitung-die-controllerin-friede-springer12308032-p3.html?printPagedArticle=true#pageIndex_3 (accessed May 10, 2014; publication is in Germany). 20 Axel Springer. 21 A national German newspaper. This document is authorized for use only by Nene Keita in Managing Strategy in the Global-1-1-1 taught by Professor Stegmann, University of Maryland University College from March 2016 to June 2016. For the exclusive use of N. Keita, 2016. Axel Springer in 2014: Strategic Leadership of the Digital Media Transformation E-522 p. 17 an earlier published article by Schmidt in which Axel Springer was directly addressed. In the writing, Dpfner admits Axel Springer's total dependence uponand fear ofthe Silicon Valley juggernaut. He explained: We need to ask ourselves whether competition can generally still function in the digital age if data are so extensively concentrated in the hands of one party...And this is precisely the reason why we now need to have this discussion in the interests of the long-term integrity of the digital economy's ecosystem. This applies to competition, not only economic, but also political. It concerns our values, our understanding of the nature of humanity, our worldwide social order and, from our own perspective, the future of Europe.22 Dpfner continued by asking Schmidt to act as a positive representative for the change he thought was needed to preserve the European digital economy. Axel Springer was a large firm by publishing standards, but was small relative to Google and other well-established technology companies from the U.S. and abroad (see Exhibit 14 for revenue numbers for several of these organizations). Thus, this would no doubt be the first of many actions the publisher would need to take to compete and survive in the digital landscape. Staying Up-To-Date With Consumer Tastes Another question the Axel Springer team needed to ask itself was: Is the company producing the content the consumer wanted? Frank Schmiechen, deputy editor-in-chief of Die Welt, explained: Should Axel Springer provide the content people want or what the company thinks is still relevant? This is the most important question a journalist addresses nowadays, and I'm not quite sure how it should be answered. For example, one of our deputy editors loves Porsches and started a car blog. After several weeks his blog is something like top 25 in Germany. It seems that he's gathering more attention through this channel than we could through some of our departments. As a company we need to evaluate why this is happening.23 Sections such as politics, the economy, and sports were established as the best ways for publications like Die Welt to describe the modern world; but was this the best way to describe the modern, post-digital revolution era? Popular topics were changing and the younger generation was responding to peer blogs and websites like Buzzfeed. How was Axel Springer going to adapt to these trends? 22 Mathias Dpfner, \"An Open Letter to Eric Schmidt: Why We Fear Google\