Sunday, April 15, 2007
New Business Model
People keep saying that a new business model is coming. (Chris Anderson of The Long Tail, Don Tapscott and Anthony D. Williams of Wikinomics, and others.) When they say this, they are referring to changes brought on by technology and the internet. I keep trying to figure out what they are expecting will happen. What will this new business model look like? What is meant by the term "business model?" I'm no economist, obviously, or I'd probably not question the term "business model." I'd just carry around the definition that some economics professor had crammed down my throat in college.
To figure something out, I like to break it down to its essence. In business, a company sells products or services. Products, at their core, are natural resources - physical stuff like food, minerals, wood, human-made things, etc. When you buy a service, on the other hand, you are buying something intangible, albeit no less real. You're buying time (like when a maid comes and cleans your house, so you don't have to), expertise (like the computer tech who fixes your hard drive after it decides not to work), entertainment (music, movies), knowledge, and attention (you buy attention when you engage the services of an advertiser).
Back when we were a nomadic society, and even in the earliest days of agrarian culture, we "bought" things through barter. "I'll give you ten chickens for that rug." This wasn't always a convenient way to conduct business. What if the rug maker wants a pig, but all you have is chickens? Then, the bright idea of currency dawned. Money became the stand-in for anything of value. (Realize that an entire society has to buy in to this idea for it to work. If someone decides that a currency isn't worth anything, he isn't going to give you a rug for a bunch of coins.) Today, after the New Age movement, many of us think of money as a symbol of energy - the energy it takes to produce something, or the time spent earning that money.
In my estimation, this is the ultimate definition of the term "business model," which is why I'm confused when people talk about a new business model being on the horizon. The fact that we have hierarchical organizations or sole proprietorships, whether we sell in a physical location or online, whether someone works in a factory, a cubicle, or from home, or all the permutations a business can take in selling products and services, these are merely frills to the underlying scheme. Sell your goods and services and make as much money out of the deal as you can. In order to get back more than you give (profit!), you have to convince the buyer that your goods and services are worth more, or you have to cut your costs in providing that good or service.
The sources that indicate there is to be a new business model point to the internet as the source of that model. They talk about the reduction in cost of holding inventory. If the goods we buy can be held in a warehouse, or better yet, held as bits and bytes of digital data, which costs virtually nothing, the seller can make more money. Yay for the seller! But this is still no different from the basic premise of doing business. We've just learned how to bring costs down to practically zero.
The other area in which I see talk of a new business model is in the music industry. Here, people are saying that the music itself will no longer be the product. Musicians will make money through peripherals, selling concert tickets and merchandise. Honestly, how long in the history of human beings on earth have musicians actually made money on the music itself? Before the advent of recorded music and copyright laws, musicians likely made their money on the performances, so we're coming full-circle.
Even stripping it all down, the idea of the "business model" still confuses me. Is it the basis of business, or does it include the frills of how that business is conducted? I wish some bright economist could explain this to me. Then maybe I could begin to see what people mean when they start jabbering about a NEW business model.
To figure something out, I like to break it down to its essence. In business, a company sells products or services. Products, at their core, are natural resources - physical stuff like food, minerals, wood, human-made things, etc. When you buy a service, on the other hand, you are buying something intangible, albeit no less real. You're buying time (like when a maid comes and cleans your house, so you don't have to), expertise (like the computer tech who fixes your hard drive after it decides not to work), entertainment (music, movies), knowledge, and attention (you buy attention when you engage the services of an advertiser).
Back when we were a nomadic society, and even in the earliest days of agrarian culture, we "bought" things through barter. "I'll give you ten chickens for that rug." This wasn't always a convenient way to conduct business. What if the rug maker wants a pig, but all you have is chickens? Then, the bright idea of currency dawned. Money became the stand-in for anything of value. (Realize that an entire society has to buy in to this idea for it to work. If someone decides that a currency isn't worth anything, he isn't going to give you a rug for a bunch of coins.) Today, after the New Age movement, many of us think of money as a symbol of energy - the energy it takes to produce something, or the time spent earning that money.
In my estimation, this is the ultimate definition of the term "business model," which is why I'm confused when people talk about a new business model being on the horizon. The fact that we have hierarchical organizations or sole proprietorships, whether we sell in a physical location or online, whether someone works in a factory, a cubicle, or from home, or all the permutations a business can take in selling products and services, these are merely frills to the underlying scheme. Sell your goods and services and make as much money out of the deal as you can. In order to get back more than you give (profit!), you have to convince the buyer that your goods and services are worth more, or you have to cut your costs in providing that good or service.
The sources that indicate there is to be a new business model point to the internet as the source of that model. They talk about the reduction in cost of holding inventory. If the goods we buy can be held in a warehouse, or better yet, held as bits and bytes of digital data, which costs virtually nothing, the seller can make more money. Yay for the seller! But this is still no different from the basic premise of doing business. We've just learned how to bring costs down to practically zero.
The other area in which I see talk of a new business model is in the music industry. Here, people are saying that the music itself will no longer be the product. Musicians will make money through peripherals, selling concert tickets and merchandise. Honestly, how long in the history of human beings on earth have musicians actually made money on the music itself? Before the advent of recorded music and copyright laws, musicians likely made their money on the performances, so we're coming full-circle.
Even stripping it all down, the idea of the "business model" still confuses me. Is it the basis of business, or does it include the frills of how that business is conducted? I wish some bright economist could explain this to me. Then maybe I could begin to see what people mean when they start jabbering about a NEW business model.
Labels: business, chris anderson, copyright, economist, goods, i'll give you ten chickens for that rug, money, music, services, society, the long tail, wikinomics
