Day in and day out, the Internet continues to show innovations from people all around the world. Yet for all these innovations, it all comes down to the very core of trying to do business in a new way.
I’ve been doing some research recently for an internal publication my firm produces on the future of the entertainment and media industries, and I wondered what exactly does it mean to do business on the Internet. Whilst there are some brilliant thoughts on what business models on the Net are, I think we lack a proper analysis of what it means to do business.
Below is a summary of my understanding from a consumer perspective of doing business (enterprise is a different beast), but which I think will help people better understand how it all works.
First of all, we need to split the three key factors about business:
- Business models: What the structure of a business is.
- Revenue models: How the business generates cash from customers to fund its operations.
- Product models: What the product is that you provide to your customers to generate the cash
Too often, these three components are mixed as one or the same. Another thing that happens, is we struggle to classify the Internet because it contains so many different types of business. Breaking it down gives us more complete view.
Business models
The first thing to understand, is how a business is structured of which there are three varieties:
- Destination: driving consumers to a point ie, a website that you try to drive usage by consumers. This was very much what the early Internet was in the manifestation of the world wide web; websites attempting to get ‘eyeballs’. Your business model is based on the premise of getting people to visit your destination.
- Platform: a service that you try to build usage by creating an ecosystem for. Arguably, the web is the platform but in reality we are seeing a different type of platform akin to the Microsoft Windows approach of creating a core service that others can build on. You could classify the web2.0 view that websites are communities in this, whereas there are companies trying to create operating systems on the web for widgets that are a similar thing. Your business model, is built on the premise that people interact on your service or use your platform.
- Network: a service that people use regardless of where they are on the Internet. This type of business is about attaching to a user as they use the Internet. It’s almost like the flipside of the above two models: instead of having everyone come to you, this is about following everyone wherever they are. Your business model is built on the premise that people use your service in a decentralised manner.
Revenue models
Revenue models are a key factor to understand as they are what sustain long term changes to an industry that is currently been pushed by venture money and acquisitions from the dominant players. There are four types of monetisation models that I can observe:
- Fees: Payment of a fixed amount for access or usage of goods and services over the internet
- Subscription: Payment of a fixed amount on a periodic basis for access or usage of goods and services
- Commission: Payment of a percentage fee of a transaction
- Attention: Consumer gives their time, such as viewing an advertisement, in exchange of goods and services
Product models
There are three types of product models:
- Markets is the term I am using to explain when businesses use the Internet as a way to allow others to transact goods and services. The product offered by these companies is effectively a mechanism to do commerce. For example, eBay offers a product model that gives the ability for people to auction goods. Their product is to offer the facility for vendors and consumers to transact. They are like a shopping centre, giving space for vendors to sell and centralising the space so that consumers know where they can buy from these vendors. Markets offer the ability to perform trade of some sort with other parties
- Hypermedia is the term I am using to describe any type of content offering to people. Philosophically, it falls under the “new media” category that I have previously linked to and I use the term coined by Ted Nelson which is the broader term coined at the same time as “hypertext”. Effectively, you are offering content to a consumer in an Internet environment. Formally defined, it is access or supply of content via visual, audio and/or text over the Internet
- Utility computing is what you can call search engines, web applications, and the software as a service variety, which essentially is about providing computing services for information. Maybe a better way to define the concept is that they are computing services that allow for productivity through information retrieval, creation or management.
It is important to note that a business doesn’t have to restrict itself to just one of the above sub-categories. A business must have at least one business model, one revenue model, and one product model (or rather, they should - web2.0 startups seem to forget the revenue model bit). But within those groupings, it doesn’t have to be just one.
Take for example Facebook, which was initially a destination business - people logged in, viewed peoples profiles and their news feed, and the company generated value for the user by them ‘visiting’. With the launch of the applications platform, Facebook became a platform, because it allowed other entities to build on top of its core service. In this regard, Facebook generated value by creating an ecosystem of applications within its confines. As for a network model, Facebook is yet to to this, but imagine if they created an ad network like Google’s - whereby information about you in Facebook is used to determine what advertising to see across the entire internet. Here the value is that Facebook helps add to your experience across the entire Internet (despite being off the actual site)
So as a concept, below is my matrix of doing business on the Internet (I’m graphically inept, but I want to illustrate the three dimensions conceptually). What do you think?
If you can draw better than me (not hard), I’ll credit you on this post!
I like the way you analyzed it. For the presentation, I think a pyramid can best represent it. My only worry though is the academic-sound of the piece.
Hey Elias. Good post. I appreciate the way you have divided up different viewpoints on business. I’m wondering where branded entertainment fits. For example, cross-media games that are commissioned by a company to raise brand awareness (and at times to advertise a product too). The player does not pay and does not have to go and buy the product either. On the one hand it can be seen as advertising but there are also projects that are not aiming to sell a particular product, instead they want players to associate a certain experience with a brand. Long-term versus short-term gain. Just a quick thought after reading your post quickly!
Oh, and what about projects where the content is offered for free but consumers/audiences are encouraged to join another community who then gives a percentage in cash to the original content creators? EG: Four Eyed Monsters did this with Sprout and OnStage (http://foureyedmonsters.com/). Or, people volunteering the amount they give for a product (eg: RadioHead & Nine Inch Nails offering their songs for free, but you could nominate how much you want to pay)?…
@Janette: this isn’t being presented anywhere. It is academic, but if people agree on the matrix, I would be more than happy to share practical examples. I blog to learn, and your comments are appreciated
@Christy: Good observations. With your first comment I think this is just marketing - the interactive experience is hypermedia as a product, as content is essentially offering people an experience. What makes this hypermedia product different in the way you describe, is what the ‘return’ is which I think you make a good point about short term and long term. So the “revennue model” when the return is branding, is that it’s a long term component of attention (short term attention is a instant sale), where the user agrees to give their time by paying attenion in return for the experience. It might be better to label “revenue model” as “return on product” as this is essentially what it is. But this doesn’t detract from the point, the “return” the company gets is “attention” from the user.
Arguably however, the actual transction occuring is between the company and the intermediary creating the game and so it’s a business to business transaction which falls outside the scope of the above matrix. The above matrix only applies when there is a direct interaction with the consumer, which technically occurs with the intermediary offering the gaming experience (and therefore, their revenue model is a fee for developing it).
Your other comment about people offering donations at any amount is actually something worth adding to the revenue model mix. Although perhaps we could expand the definition of ‘fees’ from being a “fixed amount” to a “one off amount” (and therefore is dinstiguished from a subscription which is a recurring amount; which can also be a donation but not fixed)?
Four Eyed Monsters is an interesting one. Again, it’s clear the product is hypermedia; where the confusion is is the revenue model. I think this goes back to the uniquness of the content industries in they way they are intermediaries. I think in this case, the revenue model is commission. The reason I say this, is because the revenue of the company is conditional on it meeting a hurdle - that being, user acquisition. This is similar to commisions on a transaction, where you make a percentage depending on the amount of cash raised.
Hi, Harold Jarche is also collating thoughts about open source business models at the moment - revenue being an issue as you describe above - seems similar to the web2 companies in terms of startup. How to turn from developer community, perhaps with initial investor like Mark Shutterworth did with Ubuntu, which seems a bit similar to story with founders of Twitter .
I think it gets more complex with the mobile web because of revenue possibilities or challenges with advertising - not many people right now want to receive adverts via SMS, or whilst they are browsing and they are less likely to click on them if they are using their mobile to browse - because they have less time, but Admobs seems to show that this is changing slowly Funambol seem to fit with your ‘platform’ definition with their open source mobile application server ?
A lot of sites I use appear to be just loss leaders. For example, although most Google products have some advertising component the main aim seems to be to get you to use Google search. Twitter would make a great loss leader for a large company looking to build an internet presence (News Corp perhaps). The service itself doesn’t need to be income generating as long as it provides cross-over users for other income generating services.
Hey Elias. Thanks for taking the time to reply to my comments.
I think what I would appreciate in your model then is an indication of the income sources. There is a big difference between the consumer being a source of income, an advertiser being a source of income and then some other business that you drove business too (Four Eyed Monsters example), and even a company that buys demographic information. Each of these have some effect on the consumer experience, the infrastructure of the service or product, and are implemented according to different strategic needs.
As you noted, perhaps change the ‘fee’ value to fixed, variable and user-defined or volunteered or something like that. Each one of these are strategies for specific outcomes.
Also, why not say ‘content’ instead of ‘hypermedia’? Content has more semantic stability and is more accessible, I think, than hypermedia which (in new media arts and theory) refers to a specific type of media and artform.
Hope this helps! Your post has inspired me to mock up my own business model guide on the cross-media entertainment industry specifically. Thanks Elias.