Salesforce is conducting their annual Dreamforce conference this week with a variety of speakers giving talks. One that was interesting yesterday was from Bharat Anand, who is the Henry R. Byers Professor of Business Administration at Harvard Business School.

Bharat’s talk was about ‘Digital Innovation Trends Shaping Our Future’ which is also the subject of his book that is launching in 10 days.

What is the problem with newspapers?

“I went up to the plant manager and asked, what is this room (rolls of paper for newspapers) going to look like 10 years from now?” asked Anand. “I thought I would get a rousing defense of print, but instead he walks up to me and whispers in my ear, I get all of my news on the iPad.”

Anand asked what is the problem with newspapers and what are the challenges they face? plant manager sayid it’s online news because you can get it quick, you can get it cheap, you have more variety, it’s rich media and you can personalize it.

Anand wondered how has this has effected news readership? “This has been going on for 60 years,” he said. “Oh my gosh, this has nothing to do with the internet. What started the decline? It was radio, then broadcast TV, then black and white TV, cable TV, 24/7 cable news, and then the internet. If you took out time, the impact of the internet is imperially indistinguishable from everything that came before it.”

“And yet, every story we hear is about how the internet has destroyed newspapers,” he says. “It did, but it had nothing to do with the news content. The impact was really on classifieds. Classified ads account for around 40% of the revenue of a newspaper and more than half the profits.”

Anand points out that if you look at the New York Times between 1994 and 20110, average decline in news readership was less than half a percent a year. Be he says that classifieds on the other hand, lost 90% of those revenues. Why the difference?

News is Stable, But Classifieds Have Disappeared

“The reason goes back to something pretty fundamental about behavior, which is how do we consume both of these products?” says Anand. “Which news site would you like to go to? Well, it doesn’t depend on what my friends choose. Even if my friends like Google, CNN and Yahoo, if I like the NYTimes.com, I will go there. In other words, I’m making decisions based on product quality and price.”

He points out how classifieds have a very different dynamic. “Which classified site do I choose to go to?” he asks. “Where there are the most listings. Where do people list? Where are the most buyers?”

“More listings, more buyers…more buyers, more listings, exclaims Anand. “We have what I call a feedback loop or what is sometimes called network effects, meaning my decision to go to a particular site depends on the decisions of many other people.”

A Connected Product Can Drive Success

Anand says that a connected product means there are connections between users and that news on the one hand is not a connected product but classifieds is. This has fundamental implications for a bunch of things.

He points out that for the last decade, circulation revenue for most newspapers was roughly stable. Why? “We had slight decreases in revenue per household offset by price increases, but with classifieds, we basically lose the entire thing, said Anand. “Meaning once we are ahead in classifieds, such as Craigslist and Monster, you get more and more listings, more and more buyers. It’s what we call winner take all dynamics.”

“When I have this conversation with news executives and I ask them what are the problems facing newspapers, they (typically) say it’s online news and they explain because it’s better, faster, cheaper,” he says. “At some point I ask how their circulation revenues are holding up. They say, actually pretty well. Then what’s the problem? Oh, classifieds! I say wait, you are in the news business.” He says that even newspaper executives fall into the trap thinking the problem is about content. After all he says, “We never called it a classified ad paper, we called it a newspaper.”

Where Else Do We See This Dynamic?

All over the place he says. It’s the history of digital.

Microsoft vs. Apple and PC’s: Apple has probably been the best product for 30 years, but ends up with 3% market share. Why? Microsoft owned the networks. More buyers, the more likely that other people will buy PC’s because we want to share files, more buyers more app developers, more buyers more app developers and so on.

What’s interesting about this is that we have just seen the greatest corporate transformation in history, where Apple’s market share in PC’s has increased from about 3% globally to around 9% globally. Barely moved the needle. Conversely, we’ve seen a company (Microsoft) that probably makes every mistake known to mankind, and yet top 5 in market cap. That’s the power of networks.

Facebook vs. Google+: When Google+ came out many people said, this is a better product, allowing you to create circles of friends (and much more), until someone said, there is no one playing in the sandbox but me.

eBay marketplaces: When it wins around the world, it wins big. When it loses, like in Japan and China, it doesn’t go from 80 to 75%, it goes all the way down to zero and exits the market.

AirBnB: Same idea of connections, which is the more people list on the site, more renters, more renters more listings. You end up with winner take all. This is a tweet from an AirBNB executive showing the power of networks:

Uber: What’s interesting is that when they started Uber Black with their own drivers it was sort of going nicely. But when they opened up to partner drivers, exponential growth. Again the same dynamic.

Network Connections Can Be Created

Anand also talked about how companies, such as Pokemon, can create the network effect out of thin air. “There is nothing about a card that says this is a connect product,” he says. “But Pokemon goes to great lengths to convince you and me that the value in this card lies in trading with others. Suddenly, I don’t want to be the only kid in school who doesn’t have a card.”

He also gave the example of how building tools can help news organizations create a network dynamic. Trove is a personalized news reader build by the Washington Post that was doing okay, but took off after they connecting it to Facebook, prompting millions of new readers. Unfortunately, Facebook later changed their algorithm!

Another example he gave was of a Norway newspaper called Schibsted, which actually saw this dynamic about 15 years ago. “They looked at classifieds and said this is a winner take all dynamic and that if we don’t move fast, we lose the entire game,” Anand said. “They actually built out just when the dot com bubble was crashing. Everyone was moving away from newspapers, they moved in.”

He added, “They create the online classified site, with the results being that when you win in classifieds you are 3-5X ahead of the second player. There is something quite fascinating about their market share, they now have a 90% market share of jobs and real estate in Norway, but they say in their annual report that we have a 100% marketshare in cars. I wondered why. They said that our size is actually so liquid that people all over Europe are actually listing their cars on our site.”

The Norway newspaper created this network dynamic even more spectacularly in response to the European volcanic ash crisis that started in Iceland where air travel was disrupted. “The challenge for everyone in Norway was how do I get from point A to point B with all air travel disrupted,” commented Anand. “They noticed that people were actually exchanging conversations on their website. Someone saying, anyone going from Oslo to Trondheim? Someone replies, yep, I have a car and I’m going at 3pm and I can pick up 3 people at the train station. This stuff was feeding on itself.”

What did the newspaper do? The had their IT team build an app called Hitchhiker Central that became the most important product featured during this crisis, with everyone in Europe using it.

How Companies Can Gain the Network Effect

Now, every time there is a major news event Schibsted asks, how can we help readers help each other? “As a result, their front page traffic is off the charts, online CPM’s are as high as print CPM’s, which is unheard of in the Western world,” says Anand.

“It’s about user connections,” he says. “One thing you can see is that companies that win on connections, they really don’t have to market. Think about how much Microsoft spends convincing you and me to buy the next Microsoft operating system. Effectively, the installed based is their sales force.”

He says that if you win the network game that often trumps product quality.