Is It What You Sell or How That Matters More?
LAGUNA NIGUEL — Michael Schrage, who had written this column for five years, made his debut as a conference producer here last week at an event called Spotlight, and the theme he put forward for the gathering of interactive media entrepreneurs was provocative: “We live in a moment,” Schrage asserted, “where innovative business models matter even more than innovative products and services.”
Instinctively, I disagreed. And it wasn’t just because I wanted to relive old times, when I was Michael’s editor and we argued for sport. No, this proposition was truly wrongheaded, a veritable symbol of the distorted thinking going on in the Internet business.
After a couple of days of panel discussions and conversations and back-and-forth with Schrage, I think my original instincts are correct. But the idea that the business model is now preeminent is useful in understanding much of what’s happening in the technology industry today.
The term itself refers to the fundamental design of a business, and especially how it
prices its products and makes money. In a traditional manufacturing firm, for example, the business model might be to sell lots of widgets for a low price, or a few specialized widgets for a high price, but in either case profits come from selling the goods for more money than they cost to produce.
This might seem absurdly obvious, but now consider the business model of Internet phenom Netscape Communications. Netscape started out by giving away the browser software that enabled people to surf the World Wide Web. The idea was that lots of people with browsers would create demand for Web sites, and the construction of those Web sites would create demand for Netscape’s server software, which it sold for a healthy price.
Schrage argues--and I agree with him here--that because new computer and communications technologies blur traditional distinctions between products and services, between advertising and promotion, and even between information and transactions, close attention to the business model is more important than ever.
He cites the example of the phone companies’ directory-assistance services: When they offer to connect the call for an extra 75 cents, are they in the business of selling information (the phone number) or selling a transaction (the connection)? “A piece of software eliminates the difference,” he says.
In the media business, which is among those affected most by the Internet, the business-model question is especially relevant. Newspapers, to take a close-to-home example, currently get revenue from local retail advertising, from national display advertising, from classified advertising and from selling the newspapers themselves. Clearly, the business of gathering and distributing the news isn’t going to work that way in cyberspace.
David Braunschvig, a managing director at the investment bank Lazard Freres who appeared on a panel with several other venture capitalists, identified three broad categories of business models: standard-setting and infrastructure-building, replication, and “better mousetrap.”
The standard-setters include companies like Netscape--and Microsoft--that are creating the technological base for other things to happen.
The “replication” companies are those trying to take an existing activity or service and figure out a way to do it better on the Internet. A lot of online shopping companies would fall into this category.
The “better mousetrap” firms, obviously, are those that have identified a new kind of product or service. From an investor’s point of view, it’s crucial to understand what business model a company is pursuing into order to assess the feasibility of a particular business plan.
But it’s easy to get carried away with all this. Consider the Web company Cybergold, which was exhibiting at the conference. Cybergold aims to facilitate direct marketing on the Internet by paying people to read marketing pitches and then selling to the marketers its ability to guarantee readership of a particular pitch. It’s an interesting business model, but it doesn’t look like much of a business.
Another exhibitor was Narrative Communications, a company with a cool technology for sending animated graphics over the Web. Originally the company hoped to make CD-ROM programs available online, but when the demand wasn’t there it began pushing the technology as something for advertisers to use to create livelier (read: more intrusive) Web advertisements. The business model makes sense--if you believe that singing, dancing Web advertisements have a good future.
James Murdoch, the son of Rupert Murdoch and a vice president for music and new media at his father’s News Corp., was also a speaker at Spotlight, and he represented a rather different way of viewing the world. “The challenge is how to program for this new medium,” he said. “The ability to achieve something technologically is not a reason to build an entire new industry.”
He went on to point out that the Web still reaches only about 15% of the population, and thus most efforts to create Web businesses are akin to “building a strip mall in the desert.” The whole Internet area has become “disproportionately competitive,” he said, and the valuations given to promising new companies were completely out of line.
But that didn’t stop News Corp. from looking hard at a pricey acquisition of Pointcast Corp., the “push media” pioneer that delivers information to the screen savers of idle computers and now has more than a million subscribers. (James Murdoch wouldn’t comment, but industry sources say Pointcast rejected a $450-million buyout offer from News Corp.)
News Corp. itself doesn’t appear very concerned about business models. Rather, it looks at large media opportunities--information and entertainment or services with the potential of reaching millions of people--and pays what sometimes look like ridiculous prices when it finds one it likes. News Corp. figures that if it can get millions of people to watch or read, it will find a way to make a buck.
The danger of focusing on business models is that it’s easy to lose sight of the business itself. The reason that most Web publishing businesses lose money has nothing to do with alleged reluctance of people to pay for things on the Net or the lack of payment systems, or the ineffectiveness of Web advertising, or anything else directly related to the business model. They simply don’t have enough readers. The same goes for Internet entertainment: not enough watchers.
Certainly, great technologies can fail because of weaknesses in the business model. Just look at Apple Computer. But an innovative business model that isn’t accompanied by an original, compelling product or service won’t amount to much either. On that much, at least, I think my predecessor would agree.
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Jonathan Weber ([email protected]) is editor of The Cutting Edge.
