Interview with Richard Foster Recorded at Yale Publishing Course 2012 For podcast release Monday, August 6, 2012 KENNEALLY: Summer school is in session. On the leafy campus of Yale University, the view from the classroom at Yale Publishing Course is of verdant chestnut and conquering ivy. Tranquil as it seems, wildness lies in wait. And to tell us all about that, we welcome Richard Foster, who's a senior faculty fellow at the Yale School of Management, managing partner of Millbrook Management Group, a lead director of Innosight, a venture partner at Lux Capital, and a biography that includes a long-term stint at McKinsey & Company, where he was a senior partner, leading the private equity practice. He's also the author of two best selling books on innovation, Capital Formation and Capital Destruction. Dick Foster, welcome to Beyond the Book. FOSTER: Thank you very much. Great to be here. KENNEALLY: It's great to have you here, and you've just started off the program for the week of a book publishing concentration here at the Yale Publishing Course, and I was struck by something. I don't know if you were able to notice it, while you were just opening up your presentation, but you had a slide up there of some of the innovators, some of the creative destructors that are sort of encroaching on this publishing business. They were people I all recognized. Many of them have appeared on the program Mark Coker, Bob Young from Lulu. You had someone Amazon, I think. You had a fellow from Author Solutions we just had them on the program, and of course, they just got bought by Penguin. So tell me. How is it possible that many of the people in that room didn't recognize a single person? FOSTER: Yeah, it's a great question, Chris. And it's typical of most industries that are undergoing transformation. The when we get to be very expert in a field like traditional book publishing, our vision narrows, so that we can we become very, very expert in those things which we know, and we are pre-programmed to reject information which conflicts with that which we know. And therefore, we don't even notice it. It's not that we reject it. We haven't seen it at all.
KENNEALLY: Well, in your presentation, there were a lot of things that I've kind of put in my head now as bumper stickers. One of them was this notion of cultural lockin. Is that what you're speaking of right there? FOSTER: Yes. Cultural lock-in is what happens when a company becomes really expert in their field, and they know they have the way and the method to do it. But history has never been kind to either companies or countries that have the way. That never changes. We're always changing from the outside, and the change comes from the periphery. And in the talk, I said, this is we are not in a stage of David versus Goliath any longer, if we ever were. We're in a where the battle is between Gulliver and the Lilliputians, and there are thousands of Lilliputians out there. But in order to simplify life, we focus on one or two of them, and that's the mistake. We need to see them all. KENNEALLY: Right. And one of the history lessons you gave us, it was an example of a sailing ship manufacturer/designer that struggled against the oncoming tide, if you will perhaps mixing metaphors, here of the steamship. And so my question is, as they build greater sailing ships with more mass and more sails and so forth, what were they supposed to do? Were they supposed to turn into a steamship? And so, my question is, how dose that apply to the book business? Are they supposed to turn into something else? FOSTER: The simple answer is yes, depending on who the they is we're talking about. Right? So if you're the management of the company and the employees, and you want to survive, and you want to have a career, and you want to bring up your kids and do all those wonderful things, then you do want to survive. You don't want to go out of business, that's for sure. If you're the investor, and the company gets old and starts generating a lot of cash, that's just fine, and thank you very much. I'll take that cash. I, the investor, will take that cash, and I'll invest it in a new, young upstart. I don't want you diverting your attention from that. That's the basic tension here between management and the investor. And it's a very serious event. Talk to the people at Kodak about how serious it is. Talk to the people at Polaroid. Talk to the people at RIM, any of those talk to the people at Nokia today. That was a case where they haven't paid enough attention to moving into the new business, and it's very hard to do it, but it is possible. Barnes & Noble is an example of a very good attempt to move in that direction. They pushed their stores, their formula, but they had the Nook, and they've done very well on e-books, and in fact, they had synergies between the two, because they sell the e-book in a conventional bookstore. So that's a better model, if our objective is to help the managers and employees.
KENNEALLY: Right. Well, in this struggle that's going on in the book publishing industry, there's another phrase that you refer to, this anxious enthusiasm. I think it came from, in fact, someone from the industry at Penguin. You can tell us more about that. But I see so many of these kinds of publishing courses and so forth, and I've begun to think that if there is a future of publishing, it's conferences about the future of publishing. And so, I have to ask you, whether enthusiasm is really the right thing at this moment. I mean, we are in such a point of dynamic change that the whole model is turning upside down. What is a company supposed to do to maintain a kind of if not equilibrium, at least a certain amount of composure at such a moment? FOSTER: So, the anxious the enthusiasm phrase came from John Makinson at Penguin, and he talked about anxious enthusiasm. And it's the opposition of those two words that reveals the tension in it, and both are necessary to really understand it. So I would agree that now is not a time to be blindly enthusiastic about book publishing. But we need to think about what the job of a book is, if that sentence makes any sense, and books will be around, whether we recognize them in their present form or not is hard to tell. Probably not hard to tell, actually. There will be a physical book market, just as there is a market for photographs these days. But we take more photographs today, by orders of magnitude, than we did 20 years ago, when Kodak and Polaroid were in the business. We just take them on our phones. Imagine that, a phone takes a picture, and then we save them, and we actually don't need the paper copy, which was unimaginable. So I'm not sure that if we define a book as a paper thing that falls on the floor and goes thud, that those are going to play the same role. But I believe that we'll be reading more, we'll have more outlets for print, we'll have more outlets for great ideas. The cost of that is going down, not going up. The ease of doing that, selfpublishing, which will itself probably become self-regulated at some point in time here. So I think the nature of the industry will change a lot. I think we'll be reading more and more, not less and less. But the form will change. KENNEALLY: Well, we did just see last week we're speaking here at New Haven, at the Yale Publishing Course, it's July 20th or 21st, and last week, we had the purchase of Author Solutions, one of the leading self-publishing companies. It's a global company, bought by Pearson Penguin. What do you think of such a move like that? You gave us a lot of instances where companies in various industries
survived through, as you put it, some spring cleaning and some creative destruction of themselves, and sort of purged some things and brought some new companies in, some new life in. What do you think of a move like the one that was just made to purchase Author Solutions by Pearson? FOSTER: Yeah, I think it's exactly the right thing at the right time. Pearson, not only in book publishing, and Penguin, but throughout their enterprise, are engaging in systematic program of creative destruction of the old Pearson as we knew it before. And they're doing a rather good job of it. And there's a lot of divestiture that's the spring cleaning part, and there's a lot of very careful acquisition. They followed these companies for years before they decided to buy. It's not some instinct that they have. It's very analytical. But they are determined to change their mix, and they are determined to be a survivor into the future. And I think they're doing an absolutely great job. I think their executive committee really understands what this is all about. Now, as the publisher of the Financial Times and The Economist, you would hope that they would understand these things, but it looks like they do understand these things, and they're coming along rather well. So I think they're doing exactly the right thing. KENNEALLY: Well, you presented one of your heroes from economics and talked about some of the observations that Jean Peter (sp?) made regarding the nature of capitalism. It is the nature of capitalism to be destructive, and it's really part of what it is. You can't escape from it. And so, finally, Dick Foster, if you're a company, a big company like an Apple, you had a discussion you told us about, where you discussed the possibility for the future for Apple and the correspondent you had said that they weren't going to do very well against all the garages in the world. Expand on that thought, and about the nature of competition in this new marketplace. FOSTER: Well, the challenge Apple faces now, at $600 billion in market cap and a huge corporation, one of the greatest successes we've ever seen, and they're reasonably valued in the stock market, it isn't that they're overvalued. They've done a great job, and they're very richly valued for that. But to move forward from here, and to remain to be the number one innovator in that field, that would be the first time in history that any single company has continuously out-innovated the market of which they are a part. Many companies out-innovated for a while, for a few years. Nokia out-innovated Motorola. RIM out-innovated Nokia. But the market, in the end, is the greater reality. We don't think of competing against a market, we think of competing against an individual company. We've got to change that view to understand what's going on here.
So Apple is not just competing against any single Google or Microsoft or whoever you might have, or Amazon, or any individual company that you have in mind. Apple is competing against all the garages in the world, and that's a very tough competition. And I don't think I made a forecast about Apple, other than to say, their challenges are very different now. Apple when Apple was just getting going, even when they had their second coming under Jobs, they were a relatively small company, and they could jettison things and start new things. They're not that, now. They have to deliver $100 billion of sales every year. That turns out to be a huge logistics exercise. And if people think that that can be done while not de-focusing one's efforts on innovation, well, that just isn't practical. That isn't the way it happens. So Apple has many more tasks that they have to face right now, and it's an absolutely great company. But they are competing against all the garages in the world, and that's a tough competition. KENNEALLY: Well, every company is competing against all the garages in the world right now, whether you're a Pearson, whether you're an Apple, whoever you are. That's a tremendous amount of pressure on senior executives. How do you, in your consulting work, try to address that emotional side of it, the pressure that some of these companies are under? FOSTER: Well, I think the first thing is to be realistic about to acknowledge that we are competing against all the garages in the world, and all the garages in the world are supported by all the capital in the world. So we shouldn't forget about that side, too. It's not just the garages. The garages are all funded by somebody, very experienced businesspeople who are intent on taking share from the existing incumbents and finding new and effective ways to do that. So from our part of view as a society, that's a great thing. We want that to happen. We don't want that to stop. It's one of the unique things about America, and we have the NASDAQ that allows this to happen. So that's all great. The emotional side is the need to enter into businesses which may appear to be compete with the current businesses you're in, and the nonsensical nature of that. But if you step outside that, emotionally, and step into the shoes of the customer, does the customer want the option? That's the only question you have to answer. And if the customer does want the option, and all these little garages are producing things that are bought by real customers, so you can go ask the customer if they want it, and why they like it, then I think you can begin to see it from the point of view of the garage, as opposed to the incumbent, and then I think you're on the way.
KENNEALLY: Richard Foster, senior faculty fellow at the Yale School of Management, best-selling author, managing partner of Millbrook Management Group, lead director at Innosight, and venture partner at Lux Capital we could go on about your background. But again, we very much appreciate you joining us today as part of the Yale Publishing Course in New Haven. Thank you so much for joining me. FOSTER: Thank you, Chris. Thanks very much. KENNEALLY: For all of us at Copyright Clearance Center, this is Christopher Kenneally. Thanks for listening. END OF FILE