Co-Opetition - Adam M. Brandenburger [101]
Paper Tiger In the summer of 1994 Murdoch’s New York Post was test-marketing a cut in the newsstand price to 25 cents and had demonstrated its effectiveness on Staten Island. In response, its major rival, the Daily News, raised its price from 40 cents to 50 cents. Under the circumstances, this seemed rather remarkable. As the New York Times commented, it was as if the Daily News was daring the Post to follow through with its price cut across all of metropolitan New York.5
There was more going on than the New York Times realized. Before it went down to 25 cents, the Post had previously raised its price to 50 cents. The News had opportunistically stuck at 40 cents. As a result, the Post was losing subscribers and, with them, advertising revenue. While the Post viewed the situation as unsustainable, the News didn’t see any problem, or at least appeared not to. A convenient fog. The News apparently thought that the Post would stick to a 10-cent premium—that it didn’t have the will to counter the News’s opportunistic behavior.
The Post needed to mount a show of strength, to demonstrate to the News that it had the financial muscle to launch a retaliatory price war, if necessary. The most credible demonstration would have been to actually start a price war; but that would have been rather self-defeating. The goal was to convince the News, without incurring the cost of a full-blown war. So what did the Post do?
It put on a display of strength, cutting price to 25 cents on Staten Island. Sales of the Post surged, and the News discovered that its readers were very willing to switch papers to save 15 cents. It became clear that disastrous consequences would befall the News if the Post extended its price cut throughout New York City.
It also became clear that the Post had the resolve to do just that. The Post obviously had the resources to take the small hit caused by cutting price on Staten Island. But the demonstration on Staten Island actually showed more. There’s always the risk that a price cut, even a restricted one, will inadvertently trigger a series of tit-for-tat responses leading to all-out war. The Post’s demonstration on Staten Island showed that it was willing and able to take this risk. The Post was playing a game of brinkmanship. It had the stomach for a fight.
If it had any remaining doubt as to the Post’s resolve, the News had only to look to London, where just such a meltdown scenario had taken place between Murdoch’s Times and Conrad Black’s Daily Telegraph. In September 1993 the Times had cut its price from 45 to 30 pence, forcing the Telegraph to follow suit. Profits at the Telegraph tumbled.6
The Post’s move on Staten Island wasn’t a bluff. The fog in New York lifted, and the News saw the light. That’s why it raised its price from 40 to 50 cents.
Only the New York Times remained in a fog. Murdoch had never wanted to lower his price to 25 cents. He never would have expected the News to stay at 40 cents had he initiated an across-the-board cut to 25 cents. The test run on Staten Island was simply a tactic designed to get the News to raise its price. With price parity, the Post would no longer be losing subscribers, and both papers would be more profitable than if they were priced at 25 cents or even at 40 cents. The Post took an initial hit in raising its price to 50 cents, and when the News tried to be greedy and not follow suit, Murdoch showed it the light. When the News raised its price, it wasn’t daring Murdoch at all. It was saving itself—and Murdoch—from a price war.
The lesson of this story is that credibility doesn’t come free. You have to put your money where your mouth is. Murdoch spent money to make a point on Staten Island and, given the danger of escalation, put even more money at risk. He showed that he meant business.
The same logic applies when it comes to convincing customers and suppliers that you are what you say you are. The tactic is to put on a display that makes sense only