crash course in the evolution of business models
find the bottleneck, and own it
page three of four
| previous page
like Blown To Bits by Philip
Evans and Thomas Wurster have helped me realize something very obvious
that I never knew¾there's
the physical channel and there's the information channel of the
I've got that one, thank you.
But most companies have done something very stupid; they've
blindly replicated whatever they were doing in the physical world and
are now reproducing it here. That’s incredibly stupid in 99% of the cases.
They are fundamentally different channels with fundamentally
different behaviors. You're
going to do something very different in these two channels.
You're either going to attract new segments by geography or
some other criteria, or you're going to sell different products and
services. It's one of the
two, so the challenge, when you go to a Wal-Mart or a grocery store,
is how many of those goods do you actually make a decision on in the
channel, as opposed to just being there to pick them up?
Most of them.
The problem for Wal-Mart is that they have all of this
expensive retail space. What
products do they sell in the store and what products do they sell out
of the store? In the
future, those are probably going to diverge as opposed to being
replicated. If you're a
marketing guru, it boggles the mind to think how much of consumer
marketing is irrelevant if people never step into the channel to buy
the product. How much of
promotions and coupons and aisle displays become irrelevant if people
never go into the channel to buy the product?
How do you introduce new products if people never step into the
channel? A lot of the things we think are fundamental tenets of
branding are changing in consumer marketing.
By the way, are brands going to be worth more or less in the
information economy? More?
How many think more? How
many think less? A couple
of outliers. You're both
right. The issue is, nothing in the middle. Brands will be either worth nothing or infinitely more, with
nothing in the middle. When you do work with companies, they always
think they're in the category that brands matter.
However, if you really believe in the power of the Internet to
give you great information on mortgages and mutual funds and whatever
else, if you can reduce it to price criteria and other things, then
brands mean nothing. If
you believe that the Internet and the information economy create more
confusion, more chaos and more new choice, then you’re always going
to rely on those trusted brands to help make the decision, so brands
will be worth more.
I was doing some work with a global insurance firm that had a
consulting company do a huge exercise that said their brand was now
worth $2 billion. Fantastic!
I asked them two questions.
One, do you have the best customer service in any market? Well, no. Second,
do you have the lowest price in any market?
Not really. Then
you’d better think about that $2 billion because, unless you have
the lowest prices or the best service, you're going to get absolutely
It gets back to the sensitivity analysis.
Look at the Fortune 1000 companies.
Look at the goodwill column on their balance sheets because
brand equity typically gets hidden there and it is a huge number. Just do some simple sensitivity analysis that asks what
happens if the value of those brands decreases 10%, 20%, 25%. What does that do to the stock price of this company?
I'm not saying that brands are going to die overnight or
anything like that, but I think their value will shift.
Who has the best brand in the world?
Yet in Europe and in England, one-third of all cola sold in
stores is private label. Sainsbury’s
is one of the big multi-store chains and 40% of all cola sold is
private label. If that
kind of number one brand in the world is seeing that kind of inroads,
we’d better wake up.
In terms of different segments, look at Victoria's
Secret where 15% of their in-store sales are to men.
Now, these are not cross-dressers, but men buying gifts for a
wife, girlfriend, significant other.
The thing I've discovered is that men are embarrassed to be in
lingerie stores. American
men, anyway. They
typically buy the first thing they see, walk to the cash register, pay
with a credit card, stare at the ceiling, sign the credit card slip,
take the Victoria's Secret bag, put it in a briefcase or Home Depot
bag and walk out of the store. Even
if you're brave enough to go in there, you don't go through the
shopping mall with your Victoria's Secret bag.
Yet, at Victoria's Secret online, 60% of their sales are to
men. Not browsers. If that's what you're interested in, there are more explicit
sites. That’s four
times as much as their physical channel.
Why? Because the
value proposition suits that segment.
The Internet is not about low cost; the Internet is about value
proposition. For some
people, the value proposition is low cost, for some it's convenience,
for others it's access to goods in a non-threatening fashion, whatever
that may be.
What do you think the correlation is online between men buying
lingerie and gift wrapping? It's
got to be near 100%. One
thing that the Genome project shows is that, genetically, men cannot
wrap gifts. It's one of these X/Y chromosome things.
Would a man stay in the physical channel another ten minutes to
get gift wrapping? No.
They would rather to go to the dentist twice.
Be very aware that the Internet is about value proposition.
The past few months have shown, in my opinion, that there are
very few Internet-only companies that are sustainable as stand-alone
entities. The extreme
case is pure information businesses or those financial services which
are almost pure information businesses.
Those are the only cases for which I would argue otherwise, but
very few Internet-only businesses are sustainable.
Why? Because it is
not the only source of leverage across the entire value chain.
Search economies and Internet companies have been making all
sorts of headlines because it is a new source of scalability and
leverage. We've never seen that before, but if we look at any value
chain, is it the only point of leverage across the entire chain?
No. Do a very
simple thing. Take 100%
of profit in any industry and ask how that profit gets allocated
across producers, intermediaries and customers.
I can guarantee that it’s not one-third/one-third/one-third.
I doubt it, at least. More
importantly, the shift and the distribution of this 100% of
profitability changes as people use technology differentially at these
different points. You can
track the shifts and profit as the infusion of technology occurs
throughout the value chain. Today
is telling us that the sustainable business model is in how you create
partnerships, alliances, physical ownership of assets or other methods
where you can suck the entire set of value across the value chain at
all points of leverage, not just the search economies.
That is the future. We
see more and more producers coming back to say, “We have huge things
to offer in this game.” All
of these vertical portals are coming in as manufacturer-led
saying, “Nobody can play the game unless we sell them the goods, so
we might as well do that.”
other thing I'd like to point out is a concept and buzz word I'm
trying to get some mileage with called “continuous customer
Internet lets us do it somewhat, and, especially if we get mobile
commerce and things like that, we have the possibility of continuously
interacting with our customers. All
of these discount notifications, temporary offers alerts and such are
one way of doing it, but think about a company like General
Motors. How many
people have a GM car? Probably
not too many. Wrong
demographic. The average age of a Buick owner is 62-years-old.
The big problem for Buick, this is a true statement, is how do
they get a repeat purchaser because people buy the car and die.
My advice to GM was to make the trunk a convertible coffin
option. It makes sense.
I know it's morbid, but you've got to admit it makes sense.
How many people are familiar with GM's OnStar program? You can push a button, get directions and that kind of stuff.
If you lock your keys in your car, you can call a toll-free
number, give them a security code and they'll unlock your car
remotely. If your air bag
gets deployed, they’ll call your cell phone. If no one answers, they send an ambulance and a police car to
the location. GM is
expecting one-third of their revenue to come from these kind of
services in a decade. How
often do people buy a new car? Every
three to five years, so they have a very episodic, lumpy customer
relationship. Once every
three to five years, maybe,
you'll come in for servicing. I
doubt it, because they screw you on prices so you go to some
independent mechanic. Every
three to five years they see you and they’re supposed to know you
and bond with you and love you. Yeah,
right. Good luck.
Instead, I have a continuous customer interaction that happens
when the car is a node in a computer network.
Look at what Sony is doing
for another example. If
you buy one of their top-of-the-line receivers, it has an RS-232 port
in the back. If you want
to update the features of your receiver, you download programs
straight from the Web. Same
with washing machines, etc. What
was once a very lumpy relationship is now potentially nonstop.
Again, look at what Sony is doing with PlayStation 2.
As I said earlier, that could be the dominant consumer access
device for many areas of the world.
Earlier this year, Sony bought a bank.
Let's assume that was not a random movement.
Let's assume that was a company that was realigning its
products and services to gear up for a world of continuous customer
interaction. Kids are through playing their 10 hours of video games,
parents want to get them to bed, they have a couple hours to do some
stuff on the Web themselves, so maybe one of the things they do is
connect to financial services. Maybe
it should be the Sony bank with the Sony PlayStation rather than Wingspan.
Be very aware of these trends in continuous customer
interaction and how to get value across the entire value chain rather
than at any one point.
final thing I would tell you is to get incredible IT infrastructure.
You’d better have incredibly robust IT infrastructure with
more connectivity and bandwidth than you ever thought you would need. And by IT infrastructure, I really mean the ability to have
different business units continually interacting and connecting.
We did a lot of research with British Petroleum a couple of years ago in
their exploration area, where John Brown was before he became the CEO
of all of BP. He made a
very pronounced statement when he said that in this company everything
was decentralized except IT. He
said that the reason they've centralized IT is because information is
the glue that holds the company together.
Unless you manage it centrally, you're not going to be able to
have the company change. People
had decentralized all their systems, so, when they went to reorganize
and change the business, they couldn't talk across business units.
Now, infrastructure planning is job one of the IT people. It
doesn’t sound very sexy, it’s not thrilling to talk about, but, my
gosh, it’s important!
What happens in a new channel is that new factors of risk come
to bear. Take Victoria's
Secret again. Everybody
knows by now that when they ran that Super Bowl commercial they had a
million hits within an hour. How
would you like to be the CIO who had to worry about server capacity?
How many people in a company determine server capacity versus
how many are involved in a decision about opening a new store, a new
office or introducing a new product?
Isn't it an analogous decision?
eBay has had three major
system outages. The effect of each on their stock price was 33%, 16%
and 25% in a downward direction.
I would not want to be the person who had a meeting with CEO
Meg Whitman at the end of the day to explain why I wiped X billion
dollars off the market path. That's not good. That’s
not a fun meeting. There
are very few body parts that will emerge unscathed after that meeting,
so be very aware that infrastructure and fundamental connectivity
issues are job one. Many
of your companies are growing at unprecedented rates.
Have the foresight to think about how that technology is going
to scale up, now it will connect with legacy systems outside and
everything else. It is an unprecedented challenge. Do some fundamental hygiene that will allow you to expand.
Thank you very much.
the audience: q&a
One quick housekeeping note.
Number one, there will be a midterm following this
presentation, so please make sure you have your notes.
I think this morning was extremely stimulating.
We all know at this point that things are moving very quickly.
Capital markets are volatile, and the need to be competitive
and stay competitive is critical for all of your businesses.
One misstep causes a loss of billions of dollars of value in
just a matter of hours, so this need for speed has been separating
those companies that survive and thrive in this economy from those
that don't. It's been
separating those companies that were able to raise Series A capital
four months ago when everyone could get it, from those companies that
are having a lot of problems trying to raise Series B capital now. How can we bring some of Dr. Sampler’s very important
macro-trends down to the day-to-day challenges that you're facing?
You probably have tons of questions, so let’s get to them.
What are your thoughts on Amazon.com?
I can't bet against them because of the amount of money they
have. They're doing some
interesting alliances, but, fundamentally Amazon.com
has a cross-subsidy model because, in my opinion, they've been trying
to become an online Wal-Mart.
Basically they sell books, and Palm Pilots.
That seems to be their business model, and I don't think that's
going to work.
I'm sure most of you have seen these price-searching
applications like iChoose, which is
not only a search agent, but you can download an applet that sits on
your browser. After you fill your shopping cart with books, CDs, videos and
computer equipment, just before you hit the “proceed to checkout”
button, you click on the applet, and it searches in real time for
lower prices based on what's in your basket.
It will come back and tell you, line item by line item, that
this one is $40 cheaper here, $35 cheaper there, “Are you sure you
still want to buy it from Amazon?”
That's sort of painful when people can disintermediate at point
Grocery stores have gotten away with it for years because they
have loss leaders. I'm
not going to drive across town to save 20 cents on an item, but, if I
can do it electronically in real time, then a cross-subsidization
model totally gets ripped apart. I'm very, very uncomfortable with their current strategy of
next generation of alliances with Toys-R-Us and companies like that
may be intriguing, but, if they continue with cross-subsidies, I
wouldn't touch them.
I'm Rick Kinear with Browser
Media. First, I heard
John Gage, the chief scientist of Sun Microsystems, speaking about a
month ago and he said that the total storage capacity of PlayStation 2
and Nintendo games sold this Christmas is going to exceed the storage
capacity of the US government.
I'm interested in two projects that I've heard about in
England. One was in the
early '90s called the Mondex
card, a programmable card on which you could exchange value. Also, I was talking to somebody a few months ago who said
they ran into somebody from England who had a device like a key chain
that he called his “scanner.”
When your milk is running low, you can scan it on the bar code
and more milk shows up the next day on your doorstep.
Have you seen either of these?
I've heard of Mondex. I've
seen Mondex, but it's dead. Mondex
was a card system where you could pre-store multiple currencies on the
electronic card. Just like a wallet system, you would have more money in it
than you needed for a purchase. When
you're drunk, you never want to give a the bartender a hundred dollar
bill. That's a bad
strategy, right? You give
him $5 or $10. Mondex was
able to do those kind of things; unfortunately, they were never able
to find a fuller application. Using
Geoffrey Moore's term, they never were able to “cross the chasm”
and get some critical mass. The problem they're facing now is from companies that do
smart cards and SIMM cards, which are going to be moving far ahead in
terms of secure transaction mechanisms.
I think that by the year 2003 or 2005, every credit card in the
world is going to have a smart chip embedded in it.
Mondex missed the window.
I think the small scanner device you're talking about is
store-specific. If you're
in the store, you just bar code it and you can have it home-delivered.
It's like a way to develop your shopping list while you're
walking through the store. I
think they are doing similar things in the US with shopping malls
where kids can go around the mall and scan things to develop their
Christmas wish list and such. The
parents can then see the list. There
are multiple combinations on both sides of the ocean.
My name is Michael Ellison with ICS
FoodOne. I'd like to go back to your discussion on Procter &
Gamble and Wal-Mart. If
you see disruption taking place in what you call the distribution
economies, can you comment on Internet-based home delivery services
Where are they going to be in three to five years?
Many will be bankrupt; we already see that.
The problem is that a lot of the scale effects are huge.
I think more interesting are companies like Streamline.
They have a very novel business model in which they develop
your initial shopping list for you.
They come to your house, inventory it and develop your initial
shopping list based on goods you have already bought.
See, the problem with all of these services is that you're
faced with a few hundred thousand items and can't develop a shopping
list. They took that pain
I think that most of these companies are not going to be in the
business of delivering groceries, but in selling and accumulating data
using that home delivery channel as a path to give you new products. Right now, grocery stores track this data, which is
fantastic, but what can they do with it?
They spit out useless coupons¾you're
buying one brand of baby food so they spit out coupons for another
brand of baby food. Noobody
looks at them. With these
home delivery services, however, they can actually deliver a competing
product into your home with a letter explaining it.
They may be a much more powerful mechanism for new product
introduction, and I think that's where these companies will be making
their money. They'll just
be conducting the other part as a break-even service and they'll make
all the money on introducing new products and marketing efforts, data
I'm Tom Mandel of Mighty
Acorn. That was a brilliant presentation, although I do have some
disagreements on one thing. All
retailing online is a cross-subsidized product model because everybody
sells multiple products and every product has a different margin.
The function of an economy like the Internet economy is to
force those margins down to their practical minimum, which means that
one product will always be subsidizing another if there's going to be
a customer relationship. It
seems to me that Amazon is in the business of not making you go
through that 100,000-item list you just mentioned and in providing a
practical source for purchasing them.
I don't want to maintain a relationship with six zillion
providers of goods. I don't want to disintermediate Amazon at the point of
purchase and have to maintain expectations of delivery from seven or
eight different vendors just because one of them has one of my books
for a dime cheaper and another has a second book for a nickel cheaper.
What seems to me to be happening is that you get the
possibility for marketing goods that have a limited audience because
of the ability to get information and delivery of them.
That seems like a very different¾and
Let me get more specific, then, because I agree that the
Internet is opening up new markets with lower micro-marketing costs.
You're not going to see very many bookstores in the middle of
Montana and, I agree, Amazon is trying to do that.
The point I'm trying to make, and let's push it farther, is
that I don't believe the intermediaries are dead.
Intermediaries will still exist and we’ll have more
threat to Amazon, or whomever else is carrying a broad range of goods,
is that they are providing premium service, but are they able to
charge a premium for that service?
Will a set of new intermediaries be companies like R
U Sure, or will it be companies like Federal
Express that are already experimenting with bundling themselves.
Rather than getting six packages delivered to your home because
you're buying stuff throughout the Web, FedEx is pilot testing a
program where you specify a three-hour window within a week when you
want all packages to be delivered.
After all, the people who are buying on the Web tend to be the
people whose time is most valuable and they're never home anyway.
How many times have you come home to find three delivery
notices on your door? It's enough to make you cry because you know it's going to be
hard to get those packages. FedEx
will charge you less than if they had to make three separate
deliveries, but more than the cost of one trip because their job is
more complicated. There
are always intermediaries. The
issue is not who to trust, but what's the premium we're willing to pay
for it? Let's be very
clear that if people get too greedy around the service, we always have
an easy way to litmus test the price profitability.
I agree that there's some kind of bundling model, but there are
limits to how they are pursuing it, so we'll see.
Isn't the point that the brand competition occurs over who can
customize service most closely to the needs of the individual, as
opposed to who can produce or distribute the good? That's the business that a company like Amazon is in.
Once they figure out how to customize the service to you,
they're confident they can sell you whatever they've got in their
store of goods.
I'll agree with that, but the thing you have to think about
goes back to the distribution of profitability and economies of scale
across these different points. For
certain types of products, most of the leverage may be in production.
The kind of product range that Amazon sells doesn't have a huge
amount of leverage at that end, so that's why they're able to do what
they can do.
We have some questions that were submitted on cards, so I want
to take a few of them. The
first is, “In this competitive environment what's the best way to
market an Internet business, particularly a startup?”
Well, that will be a short answer.
There are only one or two choices, right?
Obviously, there's no one right answer to that, whether it's
viral marketing or anything else.
The startups I'm dealing with in the US and Europe are doing a
lot of work with big companies and we ride their coattails into the
market. We're using
large, existing players to leverage us.
For the kind of businesses I'm involved with, that's the
easiest strategy. I like
to leverage existing channels and just be a part of the monkey on
Page three of
four | Next page