Professor Joshua Gans makes a case for disruption with Encyclopaedia Britannica
The following excerpt is taken from the introductory chapter of The Disruption Dilemma, by Rotman School of Management professor Joshua Gans:
At the dawn of Microsoft’s Windows 1.0 in 1985, CEO Bill Gates saw an opportunity for a digital encyclopedia. It would be placed on a new medium, the CD-ROM, and could potentially be seen as a “must have” application, just like MS Word which was taking off on Apple’s personal computers. A Microsoft executive, Min Yee, was charged with obtaining high-quality content for the new product and immediately turned up at the offices of Encyclopaedia Britannica, the company unambiguously at the top of the encyclopedia market. Perhaps Yee had not been schooled in the finer points of getting one’s foot in the door, but he was quickly rebuffed by the Britannica team. Had he had the opportunity, Yee might have been able to explain that their turning him away would end up hurting Britannica more than Microsoft. Britannica’s management, however, appeared to see only the cost of Microsoft’s proposal to its legacy brand and not the upside.
That brand had been built by strong selling skills. The job for salespeople was to go door to door and sell families, usually middle-class ones, on spending $500 to $2,000 on an encyclopedia when no other book they owned was worth more than $100. As Microsoft noted, “no other broad-appeal content product in any category in any medium has a well-established single-user price point anywhere close to this.”1 But sell they did, in the hundred of thousands of sets each year. And why not? They were the best in breed with half a million entries all written by experts in their fields, including over one hundred Nobel laureates.
The sales pitch was not about selling books; it was literally about “selling dreams.” Recounting his experience as a Britannica salesman just out of college in the 1970s, Josh Goldstein realized that he was not selling the text on the page but the promise of something more. If he selected the right household, he could pitch access to the best world’s knowledge and with it a bright future for the family’s children. Sometimes a customer chose the luxury-bound, premium set even without a hard sell from Goldstein:
Guilt stricken, I begged her to reconsider and go for the stripped down economy package since, as I assured her, the words on the pages were identical and would cost her $500.00 less. But she was adamant and signed the contract.2
For a few customers, the encyclopedia seller came to mean something more. Here is Michael Milton:
Yet it was this man, this anonymous figure, who sold, that is artfully (and I say, “gratefully”) persuaded, my Aunt Eva to sign her name on a three-year plan that would promise to transport a poor, poverty-stricken Southern child from a five-acre farm, a hardscrabble farm at that, to tour the world without ever leaving his bedroom. There was never a greater encyclopedia then [sic] the Encyclopedia Britannica and never a greater voyage to be had.3
Decades later, Milton remembered the sales technique, the presentation of a couple of volumes the salesman carried with him, the full-color pictures, and the pitch that “to acquire the Encyclopedia Britannica was not merely a purchase, but an investment in the education of her boy.” His Aunt Eva bought them for him and Milton devoured them accordingly.
As it turned out, while he may not have been alone, Milton was a rarity. Despite this sales pitch, even Britannica knew that the volumes were mainly for display. To own them and place them on shelves in a living room was a statement that the household cared about the education of their children. There, these symbols gathered dust, opened on average just one or two times a year.4
With that in mind, it is perhaps appropriate that I open this book with Encyclopaedia Britannica as an example of disruption: of how successful companies, continuing to do what made them successful, end up falling to the point of failure. The story of Encyclopaedia Britannica seems a simple one. After turning Microsoft away in 1985, it kept doing what it had done for decades. Meanwhile Microsoft acquired the content it needed from Funk & Wagnalls (ironically remembered as a poor person’s Britannica) and launched Encarta which would sell millions of CDs, dwarfing Britannica ’s best years. After its success, of course, Encarta followed a similar fate in its turn, falling by the wayside with the unexpected success of Wikipedia, an encyclopedia that wasn’t a business at all. Encyclopaedia Britannica, now a shadow of its former self, opted to discontinue the print version and with it the encyclopedia salesperson in 2012.5
Anecdotes, however, are not all they might seem. Even the simplest accounts look very different when you brush away the dust and explore what really happened. First of all, for Britannica management, rejecting Microsoft was actually an easy decision. In 1985, Microsoft was still a young start-up, far from commanding the reputation it would a decade later. Computers themselves were in very few households (around 8.2 percent).6 Finally, you could hardly display a CD-ROM in your home the way you could a shelf of encyclopedias. There was no symbolic display of the fact that your cared for your children’s future, and thus, one could imagine, no incentive to make the purchase.
Given its management’s information and perspective, then, Britannica was essentially right to dismiss Microsoft’s proposal. Britannica was what we would today call a platform, and the main people it had to recruit, other than customers, were salespeople and contributors. While many today mock Wikipedia editors for doing their work for free, that was essentially the same deal for Britannica’s expert contributors. They were paid little except for the prestige of having an entry on their resume. It is far from clear that these experts would feel the same way about contributing to a digital edition. More importantly, a lower-priced CD would not fi t in with Britannica’s sales process. Salespeople got paid on commission but in return needed to know that the company had their back. If Britannica started selling a digital computer product in stores, it could easily disrupt a careful balance of incentives and trust the firm had been built on. Indeed, even with the rejection of Microsoft, Britannica sales continued to grow in the years following—that is, until they peaked in 1990.
As early as 1983, salespeople were taught to dismiss digital options, claiming that it would take 100–200 floppy disks to hold just Britannica’s index, that mainframe remote access would be clunky, that there wouldn’t be enough words on a screen, and how could you search for an entry anyway? In fact, however, by the late 1980s Britannica was actively experimenting with digital media. It launched a “NewMedia” version of Compton’s Encyclopedia in 1989 (with sound bites narrated by Patrick Stewart, of all people), becoming the first encyclopedia on CD-ROM. This was seen by Business Week as pathbreaking but it was also expensive, priced at $895.7 Thus it failed to get any traction, and Britannica exited that line in 1993 with a sale of its NewMedia unit to the Chicago Tribune.
The early 1990s brought more experimentation from Britannica, though this was concentrated in its Advanced Technology Group based in La Jolla, California—half a continent away from the Chicago head office. They registered EB.com in 1993 before browsers existed, but when the browser arrived Britannica Online became available in 1994. This was not a sign of complacency about digitization but, in fact, a remarkably prescient assessment of the future.
So what happened? Britannica’s sales peaked in 1990—three years before Microsoft launched Encarta at a price point of under $100. Britannica responded with its own CD-ROM, this time of its famous encyclopedia, but it sold for $1,200 (though the price steadily fell to $200 by 1996).8 Britannica’s digital offerings were actually successful but did little to stem the overall losses from the new intensity of competition.
In reality, Encyclopaedia Britannica was not competing with Encarta but instead with the computer.9 Recall the sales pitch that Britannica was an educational offering and a way for parents to put their children on a new path. The path was valued at around $1,000, but during the 1990s, for a little bit more, you could buy a computer to fulfill the same dream, and with a relatively cheap encyclopedia included, thanks to Microsoft. Later on, with the Internet, you did not even need the Encarta add-on. While Britannica’s salespeople may have been able to explain why their encyclopedia was the best encyclopedia, it is far from clear that they would have been in a position to take on the computer.
With the benefit of hindsight, was there something Britannica could have done to forestall disruption? As I have already noted, Britannica did, in fact, see change coming and set up a separate, independent division to deal with that change. The problem was that the division was ahead of its time. It did not generate a solution; instead, the solution would likely have had to involve Britannica investing simultaneously in different ways of delivering the dream of education. Imagine, for instance, an Encyclopaedia Britannica -branded computer around 1990, with the encyclopedia preinstalled. The dream could sit on a desk rather than a shelf. Now imagine how a door-to-door salesperson would have had to sell that dream. No longer could it be done with books under an arm; instead the salesperson would have to tote around a heavy computer and small monitor (there were no portables then) and then seamlessly set the thing up in people’s homes. Add to that a complete retraining of the salesforce and it is hardly surprising that this option was never exercised.
Britannica’s case illustrates all of the elements of disruption. It shows that good and farsighted managers might reasonably choose to minimize opportunities to catch a new technological wave. It also shows that even if they were to choose to try to catch it, the problem of coordinating the necessary organizational change would surely be a challenging one. It might well strike fear into the hearts of business leaders and suggest that perhaps there is only so much they could do. Britannica demonstrates alternative mechanisms by which disruption can emerge and how it can be managed. On the consumer side, it looks like the digital products competing with Encyclopaedia Britannica were initially of lower quality, but ended up challenging it competitively later on. Britannica had experimented with digital products and had the means of riding the storm had it so chosen, but was unable to respond in the educational dreams market that it had traditionally dominated. To sell a dream in a digital form would have required Britannica to make a change in its organization; in other words, to become a completely different company. Indeed, it is arguable that no firm replaced Britannica in the dreams department; it was instead computers and the Internet that allowed families to put it together in another way.