Where’s The Business Model in the Information Revolution?
This unfortunately, and inevitably, is a complex description of what we’ve learned in our quest to answer the question “what happens when the cost of software drops to zero?”
We don’t make any pretensions as to academic leadership, but the article does have some authority – written by an accountant who’s spent the last thirty years selling software, and the last three finding the answer to the question.
And any way if you want to get the same message from somebody with real authority watch the full programme at Free – The Future of Radical Price
Summary
Business will never be the same again. We may not be able to predict what it’s going to be like, but we do know it will change, and keep changing. Anybody in business, or wanting to be in business, is going to have to understand, and accommodate/exploit, rates of that change to find business models which make money.
Background
The scene for this was set by Nicholas Negroponte in Being Digital (1995) when he explained the separation of bits from atoms and the impact this would have on the world. He presaged the Information Revolution.
Anybody who hasn’t read the book can be excused for thinking that Information Revolution has happened, but they’d be wrong. We’re currently working through the death throes of the Industrial Revolution. The Information Revolution hasn’t started yet.
Agreed, the successful businesses today are competing on the basis of information as we know it, but their business models – how they make money – are all rooted in the Industrial Revolution.
As mass production emerged businesses competed on their ability to dominate distribution of their products. They created One to Many distribution channels, and the channels competed until one triumphed over the others. In this way we saw entire industries distilled into a small number of brands.
The business models we see today, even for the newest information based companies, are all One to Many models competing with their ability to dominate distribution. Google, Yahoo, Microsoft, SAP, Oracle are all examples.
- Google is perhaps the most interesting. It dominates Search and so is the only game in town for people like us who want to be found. It dominates Search, so it’s the only game in town for those who want to advertise. It dominates the distribution channel and sets it’s own rules.
- This is no different to the situation Microsoft built through the 1990s. Hardware manufacturers, software developers, computer retailers and service businesses, even corporate IT departments all had to dance to the Microsoft tune. It was the only game in town.
They are both One to Many distribution models and will need to change, or die.
Direction
Back in 1995 Negroponte kicked off a conversation which has since been added to by Chris Anderson, in the Long Tail, by Malcolm Gladwell and Don Tapscott in Wikinomics – plus a host of others of course. This conversation has anticipated the impact of Many to Many markets and the disruption of existing business models. Recently Anderson has acceleratedthe discussion with his new book Free The Future of Radical Price.
Bring together the concepts of Free and Many to Many markets and we get an idea of the perfect storm arriving soon – the transition to the Information Revolution. In fact it’s already started.
The simplest example is blog marketing. Blogger provides us hosted software, for free. Ezine Articles (and lots of other sites) provide us with content, for free. Google finds us people to pay for ads on our blog, for free. Within an hour of starting each of us can join the ranks of the Many marketing to the Many, for free.
Many to Many distribution, and Free, bring millions of suppliers into the market to provide for millions of customers. Most offer something based on software, and most of those are built in people’s spare time – essentially for free. Hosting is effectively free, as is distribution. Experts in every field can offer something to the individuals who need it, when and where they need it.
These new entrants can effectively offer their product/service for free. Joining the race to the bottom they can wait and watch while the One to Many businesses go bust under the pressure of thousands of competitors setting a price expectation below their break even point.
Challenges
So it’s easy to see how the demise of major players can come about remarkably quickly. It’s much harder to see how the new entrants are ever going to make money. Surely the minute they try to monetize they’ll be hoist on their own petard. A new kid on the block will do to them what they just did to the previous incumbent.
Well not quite. We don’t get to make money like the One to Many guys through price. We only get to make money when people use what we give them for free.
This isn’t a new concept. Unlike Many to Many, Free has been around for a long time. Perhaps the best example is the man’s razor, heavily subsidized at the point of sale by a manufacturer who earns on every blade used, and keeps doing it. And unlike razor blades, software or services don’t have a physical presence we can assign a price to.
So making money in the Free, Many to Many world of the Information Revolution has its own, significant challenges.
Those of us in this business have to find ways of catching the attention of our users/customers, making them want the benefits we offer, motivating them to use our stuff, and then make money out of the fact they’re using it, probably not through price.
Implementation
Having innovated in the development and distribution of our software/service we need to innovate even more in our other processes. Attracting users through free channels, exciting them with ideas, building confidence with our service, and rewarding them – all so somebody else can reward us. And we have to do all this at, or close, to zero cost. The minute we start paying for anything we erode our main advantage.
Examples
There are two excellent examples of the two dimensions 1) rewarding users and 2) paying for stuff
Zemanta has been quietly building a presence in blogging over the last year or so. The blogosphere is a very noisy place with endless free offers around so getting air time can be hard. Zemanta first built a plug-in for WordPress, and offered it for free. Then it built an Add On for Firefox and offered it for free. Early adopters found a number of benefits. As a post is being written Zemanta offers images and hyperlinks to information sources, and suggests tags. It also offers a list of other people’s content. Links to other relevant articles can be selected and inserted by the user.
We get rewarded for using Zemanta and Zemanta makes money because we use it, but price never gets mentioned.
In my other example we can see the difficulty of paying for the presence Zemanta gets for free.
An Industrial Revolution company masquerading as an Information Revolution business is salesforce.com.Any new entrant in the business software market runs up against salesforce as soon as it’s persuaded to pay for advertising. The One to Many guys have developed a commercial model based on Pay Per Click and Conversions. The theory is the advertiser can spend more of it’s cost of sale budget on advertising and get it back from usage price.
This can obviously work provided the cost per conversion and revenues from price are predictable. But they aren’t. The typical model is a) sign up today, b)first 30 days free, c)on-going $x/month. Using this approach the critical success factors are 1)cost per click 2) clicks per conversion 3) transition from free to paid 4) number of months the user pays.
That’s a lot of variables to try to make predictable and discovering a combination which continues into a mature business must be very expensive.
Here’s where salesforce comes in. The company isn’t really interested in the small business software market, but it does want to dominate the space where anybody who is will need to advertise. The price of PPC isn’t set by the advertiser. It’s set by somebody else following a different agenda.
Most new entrants will run out of cash competing for ad position long before they get close to looking for ways to exploit what they’ve got.
Our Case Study
In our business, having wasted a modest amount of money on PPC, we decided to replace the typical advertise, contract, invoice, service, invoice upgrade process with one more closely fitting the challenges of the Free, Many to Many distribution model.
It turned out we could get people to register for our service, but couldn’t persuade them to use it. This is the fundamental problem of the sign up for free approach.
So we decided our real problem was Adoption (and to an extent it still is). The adoption problem arose from three issues:
- There is an implementation phase which is fundamental but a barrier
- Users needed to understand how they could use the software and this takes some thinking about.
- We needed to attract people, for free to messages which created an aspiration sufficient to motivate them to address the previous two items.
From this we identified our own process – Attraction, Aspiration, Adoption, Exploitation.
Now we can monitor the ways we attract visitors, which content they access, progression to sign-up, and adoption. We can see where the process breaks down, and in fixing those we’ll be able to build a predictable model. Predictability is the key to exploitation.
In summary, we haven’t yet identified a business model for the Information Revolution, but we do know it isn’t just software.
It’s based on something like Zemanta, rewarding people for using the service, and bringing them to adoption in a predictable, and free, process.
If we can do that we’ll have a business, and so will anybody who can do the same.
Related articles by Zemanta
- Give ‘em something for nothing and make your fortune (guardian.co.uk)
- Chris Anderson: Nothing’s free, sorry. (myventurepad.com)
- Free and Cheap on the Internet (telegraph.co.uk)
- Who pays the price of a free-for-all? (guardian.co.uk)
- Freeconomics 2.0 – or how Pay! is the New Free! (broadstuff.com)
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