14 March 2013

The Business Innovation Gap

With all the buzz around the pace of innovation in the marketplace, there has been very little discussion around the lack of good business models to support it.  A recent Fortune article  brought the need for  creativity to light, but clearly pricing and business models have not kept up with advances in products and service offerings.  It's interesting to address why there has been so little business invention and who are the winners and losers created along the way. 

No matter how scalable, free still doesn't work as a business.  When information first became widely available online, many, such as newspapers, rushed to post their content for free.  Partly driven by fear of the new medium, the industry failed to realize that Yahoo News was vastly different from the Topeka Gazette.  In hindsight, it seems simple - guide your subscribers to the website and charge for advertising in a similar manner.  It is hard to see how the new approach of building paywalls now will work after years of free use.  The music industry sealed a similar fate when they agreed to allow Apple sell its content for less than a buck when the current asking price at the time was closer to $15.  If the companies behind the products are open to give them away, it's difficult to ask customers to take an alternate viewpoint.

Google took a different approach.  Although the Google X factory is what most talk about, the auction pricing model was one of the most innovative and profitable inventions in recent history.  Sure Google's algorithm was the best, but Yahoo! had a decent one with an imbedded customer base.  Google figured out a unique way to charge for its technology and was not shy to ask for a hefty price for it.  And did it ever payoff - Adwords is a growing $12B / quarter business representing over 95% of Google's revenue.  There were many great technologies and websites during that time, but many failed due to the fact they couldn't figure out how to make money. 

Even the current kings like LinkedIn and Zillow have been allowed to defer their "monetization" strategy, but eventually they will have to figure it out (perhaps when the stock markets cool).  They are finding it difficult to generate revenue after the fact rather than during the initial roll-out.  How will Facebook start to extract money from its 1B users who are accustomed to ad-lite free access?  The answer is slowly, and probably sub-optimally.
There are numerous industries and companies at a crossroads with their business models.  How will Hertz alter its revenue model when ride share gains mass traction?  Manufacturers like Intel once relied on its massive factories to build barriers to entry; but technology has decoupled production from design allowing ARM and others to steal market share at more cost effective price points.   Microsoft has struggled with their cloud pricing while new entrants like SalesForce grew up SaaS-based don't at all.  Perhaps what Microsoft hasn't realize is that Office is still Office;  Why change at all ?

Don't get me wrong, I am the first to welcome the fact that the internet revolution has been led by technologists rather than MBAs.  However, many companies, whether it be incumbents trying to adapt existing business models or upstarts struggling with monetizing innovation, face challenges in the way they go to market.  Some keys to success may lie in successfully coupling the timing of product launches with a sound business plan, remaining flexible in adapting revenue models to changing market conditions, and pricing courageously based on a company's true competitive advantage.  So while it's never too late to fix broken models, it is certainly worth a shout out to Zuck and others to invite us business guys to Hacker Camp too!


  1. >>How will Facebook start to extract money from >>its 1B users who are accustomed to ad-lite free >>access? The answer is slowly, and probably >>sub-optimally.

    One way facebook is currently looking to extract money from the U.S recipient portion of it's 1B users is facebook gifting.

    oh and with that ad-lite approach, revenue = 5.09B, gross profit = 3.72B, EBITDA = 1.19B. Not bad.

    >>Sure Google's algorithm was the best, but >>Yahoo! had a decent one with an imbedded >>customer base. Google figured out a unique >>way to charge for its technology and was not >>shy to ask for a hefty price for it.

    yes google's auction model introduction was the perfect method to charge for the service. the difference though between google's "best" algorith and yahoo's "decent" one was very big and key to google's success.

  2. Agree. But fb has a long way to go to justify their market cap. Google had the courage to not give away their competitive advantage like many dot coms did to gain eyeballs. They made money from the start.

  3. I was wondering if you ever thought of changing the structure of your site?Its very well written; I love what youve got to say.But maybe you could a little more in the way of content so people could connect with it better.Youve got an awful lot of text for only having one or two pictures.
    Maybe you could space it out better?

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