Make Love — and War

Tough times are producing some surprising business bedfellows.
Economist StaffAugust 8, 2008

COMPETITORS often find it hard to be civil to one another in public. But few rivalries have been as nasty as that between two New York newspapers, the New York Post and the Daily News. The “Daily Snooze”, as the Post dubs its rival, takes great pleasure in rubbishing its arch-enemy, and vice versa. Scurrilous gossip about the Post’s owner, Rupert Murdoch, is avidly reported by the Daily News; its proprietor, Mortimer Zuckerman, has been the target of less than flattering coverage in the Post. And the two titles like to bicker over which has the bigger circulation.

Yet behind the scenes executives from both papers are talking about working together in some areas, such as distribution, in an effort to slash costs. Nor are they the only rivals thinking the previously unthinkable. With the global economy on the rocks, businesses everywhere are desperately searching for ways to save money or boost revenue—even if they require collaboration with the enemy.

Arrangements in which firms compete vigorously with one another, while also co-operating in specific areas—known in management jargon as “co-opetition”—are not new. Carmakers have long collaborated on vehicle platforms, engines and so on to achieve economies of scale. And airlines have shared check-in, gate management and other facilities.

But given the dire state of both those industries there are likely to be more such deals. In July BMW, which makes the Mini, and Fiat, which produces the rival MiTo under its Alfa Romeo brand, said they were considering joint production of components and systems for their vehicles. “There has definitely been an uptick in co-opetition,” says Barry Nalebuff, a professor at Yale School of Management and the co-author of a book on the subject.

Let’s be frenemies

Economic pressures have also brought New York’s feuding dailies to the negotiating table. Even in good times, the Post lost millions of dollars a year and the Daily News struggled to turn a modest profit. Now, with advertising migrating to the internet and the economy slowing, things look even bleaker. (On August 5th News Corporation, the Post’s parent, reported healthy profits for the last quarter of its fiscal year, but warned that next year’s growth would be “less robust”.)

While newspapers are already carrying fewer ads, parcel-delivery companies fret they may soon be carrying fewer packages. Faced with an ailing American economy, two such firms, DHL and UPS, are planning to collaborate in the express-delivery market there. Under the terms of a proposed ten-year deal, UPS, which has some excess capacity in its American air-freight network, would carry DHL’s packages on its planes inside America—and between the United States, Canada and Mexico—for a fee of up to $1 billion a year.

The impetus for the deal came from DHL. Its American express-delivery business is bleeding red ink. By working with UPS and restructuring its own ground-delivery network, the German-owned firm plans to slice its losses in America from a forecast $1.3 billion this year to $300m by 2011. As for UPS, it could do with the cash: its second-quarter operating profit shrank by 18%, to $1.45 billion, owing to rising fuel costs and the stagnant American economy.

Crafting co-opetition deals is a tricky business, not least because potential partners need to swallow their pride first. Firms also need to be very clear about what will and will not be covered by a deal. “You have to figure out exactly where you are co-operating and where you are competing, and not get your staff confused,” says Harold Sirkin of the Boston Consulting Group.

Newspapers, for instance, tend to differentiate themselves by their editorial content and the quality of their advertising-sales operations. So editorial and advertising departments of rival papers must be kept separate if they are to retain their distinctive identities. But distribution, printing and back-office operations are easier to consolidate without blurring brands—which is why the Post and the Daily News are exploring such possibilities.

Clarity is also essential when it comes to persuading antitrust watchdogs that a link-up is benign. Sometimes even the whiff of co-opetition can cause other firms to cry foul—as Microsoft did a few months ago when it emerged that Yahoo!, an internet firm, was planning to outsource a chunk of its search-advertising business to Google, its main rival. Would-be partners must be able to show that it is in customers’ best interests for them to co-operate.

UPS and DHL stress that their proposed deal just covers air freight; they will still compete in all the other bits of the express-parcel business, including ground collection and delivery. (They also point out that FedEx, another competitor, carries express packages by air for the US Postal Service.) “When this deal is finalised, nothing will change the fact that we are a rabid competitor of DHL,” says a UPS executive. DHL says it will bite back by using the savings from the UPS deal and from reconfiguring its ground network to offer a cheaper alternative to services from UPS and FedEx.

Frank Appel, the boss of Deutsche Post World Net, DHL’s parent, is confident that a deal with UPS can be reached before 2009. But it could be blocked by a legal challenge from unions which are furious that the firm is closing its air hub in Wilmington, Ohio, triggering thousands of lay-offs. Mr Appel says he needs to stanch DHL’s huge losses in its American express service now to prevent many more job losses in future.

As for the Post and the Daily News, it seems unlikely that any deal would encompass areas, such as advertising, that would worry trustbusters. And merging the editorial teams would be unthinkable—which means readers will still be able to enjoy the tabloids taking potshots at one another in print.