Rebooting Business

Date: 07-07-2011
Source: The Wall Street Journal

There are two kinds of business models: those that have been disrupted by technology, and those that have yet to be
Any business model that can be disrupted by technology will be, and probably should be.

According to author Don Tapscott for some firms it is already too late. Their business models have been rendered redundant by new technology, and their failure to respond has resulted in a rapid decline.

The reality that technology will leave no business – be it private or public – untouched is now firmly on every organization’s radar. New business models will be dictated by the technology that disrupted existing ones.

In this section, we focus on how businesses are using nascent concepts such as “anything-as-a-service”, “multisided business models”, “the co-creation of content” and “innovation from the bottom of the pyramid” to create successful and sustainable businesses in the face of disruption.  Apple was a traditional company. It was mainly a one-sided business, selling computers largely to consumers. Now iPods, iPhones and iPads are just parts of several multisided business models. They are not just products for sale, but platforms for accessory manufacturers, app designers and content creators. And Apple has monetized the whole value chain.

Global Interface
Mr. Tapscott argues that the platform and the opening up of the programming interface is more important than the product itself: “You create platforms upon which the world co-innovates and co-creates value. The thing that makes the iPad different to other tablets is the applications. The iPad actually has technical inferiorities to [other tablets] like the RIM Playbook. But Apple opened up its API (Application Programming Interface) so the world could develop all this capability on top of it.”

Apple generates revenues not just from the physical product but also through the services offered by the thousands of apps created by third parties but sold through its App Store where it takes a commission.

This shift is reflected in the growing trend of software as a service, where products are now offered as a service that is paid for on a usage basis.

“For the last few years, the proportion of money being produced by services has been rising at the expense of income from products,” says Alex van Someren, partner at Amadeus Capital Partners. He describes Shapeways as an example of the type of business he expects to develop over the next three to five years. It represents both a product that’s been turned into a service and a multisided business model.

Shapeways is a service that allows customers to create their own designs for anything from jewelry to furniture using simple software. These are then turned into real plastic, metal or ceramic products using 3-D printing technology. It does not stop there. Customers can become suppliers for Shapeways’ online marketplace which sells the products they have designed.

There are also more prosaic forces at work according to Jass Sarai, PricewaterhouseCoopers’ U.K. technology sector leader, who says two of the main drivers of innovation would continue to be commoditization and price erosion: “Your model will have to be such that you can deliver it over the mobile, over the desktop and over the Internet in the cloud. But it’s got to be low cost.”

Skype co-founder and founder of investment capital firm Atomico, Niklas Zennström, believes the opportunities for innovation are likely to improve over the next three to five years. Particularly important, he says, would be the fall in the price of smartphones and tablets which will put them into the hands of many more consumers.

“The best opportunities will be for new entrants focused on the mobile experience. They have the potential to disrupt existing companies that have been focused on the web model using laptops and other computers,” he says.

Some of the new entrants in the marketplace could come from “innovation from the bottom of the pyramid” such as Telecom provider Safaricom which offers banking to millions of Africans via its M-PESA mobile-phone banking service who otherwise are ignored by traditional banks.

Connective Collateral
Mr. Tapscott says that some industries will have to think the unthinkable. The pharmaceutical industry is about to fall off a patents cliff yet it is doing little to address this: “It needs to start sharing clinical trial data. Maybe that’s the dilemma of why we are not seeing this big dramatic business model transformation. Increasingly, the pharmaceutical companies’ fates are connected. They need to get together.” He claims that sharing data could reduce costs by a third.

The days when falling revenues and sales were countered with cost-cutting are over: “You’re going to lose 40% of your revenue overnight. What are you going to do? Trim some administrative fat? No, you cannot do that anymore,” says Mr. Tapscott.

The Expert’s View: Barry Maloney, Balderton Capital

We are in the early days of  e-commerce, mobility and data proliferation which, in the next three to five years, will overturn many established business models according to Barry Maloney, co-founder of Balderton Capital, a European early-stage venture capital firm. “It’s always hard to predict the future, but probably the best opportunities we’ve seen for years are ahead of us,” he says.

The biggest challenge is figuring out the impact that the massive proliferation of mobile data is going to have on business models globally: “Consumers are going to be able to cut through value chains where there’s significant amounts invested today,” he says.

“If you think of the size of the investments businesses have made in things like warehouses and shops on the high street, it’s clear there’s going to be a huge disequilibrium coming as e-commerce really bites. The value that’s built up in bricks and mortar is going to evaporate because technology’s going to enable consumers to deal directly with sources that provide what they want,” he says.

With the growth of 4G mobile data networks, cloud computing and worker mobility will come the need for huge network upgrades: “That whole area’s going to have to be dramatically re-engineered because the operators know they can’t keep buying what they’ve been buying in the past and still make money in the future.”

At the same time he believes many of the biggest players in the world will be pushing and tugging over so-called “net neutrality” where all data is treated equally. It’s a principle which has helped video-streaming businesses such as YouTube and Netflix reach initial critical mass with relatively low capital expenditure, despite being huge consumers of bandwidth.

“The networks which have spent billions on capital infrastructure up to now are asking: How much longer will I continue to give the people who are benefiting from this a free ride?” As global venture investors, he says: “We’ll be looking for opportunities to invest on both sides of that play.

Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: