Business Models Gone Bad

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Motivational speakers targeting business audiences get a lot of mileage out of the old Encyclopedia Britannica story. You know, the one about how Microsoft (Nasdaq: MSFT) bought up tired old Funk & Wagnall's, turned it into Encarta, and blew the old queen out of the water before she knew what hit her.

The truth is a little murkier, as EB is still around, but the fact of the matter is that a lot fewer folks have back-breaking volumes on their shelves than they did a few decades ago. (My parents couldn't do much better than a set of Jurassic-era used World Books -- Alaska is a state? The Redskins have an offense? -- but I loved them anyway.)

A lot fewer folks have day planners, too. I was reminded of this earlier this week while looking over the latest financial report from Franklin Covey (NYSE: FC). Remember that one? There was a time it, along with Day Runner, ruled the roost in the paper planning business. Nowadays there's little to recommend an investment in Franklin Covey, and Day Runner was folded into MeadWestvaco (NYSE: MWV) in a 2003 deal that hardly registered a blip on the handheld.

Franklin Covey on Monday released full fiscal year (ended August 31) financial results that resemble a painting of a puppy paddling water -- only not as cute. It managed to trim operating losses substantially -- not because of growth, but because of cutbacks. Revenues fell, and the company slashed costs in concert. Encouraging? As Best in Show'sHarlan Pepper might say, it is and it isn't. (He might also say "pistachio nut" or "all-natural white pistachio nut.")

With narrowing losses, some cash on hand, and little debt, Franklin Covey might make it -- though with a market value around $36 million and a share price below $2.00, it's not for investors who aren't well-schooled in the ins and outs of small-company investing. Instead, most folks might want to be reminded of yet another way dominant companies can stumble and fall.

The "old" Franklin Covey and Day Runner had a classic razor/blade model: Buy one planner, come back for the refills. Once established, such models are hard to upset -- unless your idea is to eliminate them completely. PalmOne (Nasdaq: PALM) and others did just that to the planner makers, leading to a very sharp turn in business history.

For more reading on this topic, consider Bill Mann's excellent April article "When Business Models Bite."

Fool contributor Dave Marino-Nachison doesn't own any of the companies in this story.