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The Friction-less Internet and business models

Sunday's New York Times Magazine has an article – "Sex, Drugs and Updating Your Blog" – that is a must-read not just for folks in the music business but as a prime demonstration of the power of the Internet for friction-less sales, marketing and distribution.

It's a set of anecdotes that demonstrates the new wave of business innovation that's at work right now – not just in music but across media AND information technology.

This wave of business innovation leverages the effects of convergence – the convergence of the Internet, Mobile and Information Technology and the disruption that results.

The combination of the Internet and Mobile gives you access to almost 3 billion people and 95% of companies that you really care about.  You can use this access to get essentially zero-cost reach and with that many people and businesses, no matter how small your interest or niche, it adds up to a reasonable size market or better.

We've seen the use of the Internet for sales (e-commerce) and distribution (Salesforce.com with software-as-a-service or YouTube for media distribution) many times before but precious few examples of using it for sales, marketing and distribution combined within the same business.

Basic information technology is now a commodity – think about computing hardware (PCs, notebooks, servers), purchasing decisions are based on cost, brand recognition and service/support.  Prices are the same within a narrow range and switching costs are low. With software you have a choice - proprietary (Windows, Oracle, …) or open (Linux, MySQL, …) – you can choose your software environment and implement it on any hardware.  Combine basic IT with the Internet and you can access compute resources on demand and at the scale you need (think Amazon EC2, S3 and what will follow).

If you look at these effects combined, you have a business model with two critical attributes – friction-less sales, marketing and distribution coupled with elasticity where the business can scale its expenses as revenue grows – I call this the FL/EL (friction-less, elastic) model.

Gone is the need to build and operate a data center with its associated capital and operating costs, gone is the need to build a large direct sales force and invest in expensive marketing campaigns to create customer awareness.  The cash requirements for a new business drop precipitously as a result.

The NYT article shows how musicians are using the Internet to build their business – independent from record labels, radio stations etc.  The equipment they need to record, produce and release music is inexpensive and using the Internet, their costs for promotion, sales and audience interaction are very low.  The need for the record label to identify and promote talent is dwindling away.  The Internet provides a real-time "American Idol" with greater reach and more dynamic feedback.

This same approach – combining friction-less sales, marketing and distribution over the Internet with an elastic cost structure – can be applied to many different businesses.   Think outside the box – think about how you can use the FL/EL model to disrupt the incumbents or deliver capabilities at a price point that enables much bigger markets to be served profitably.

Over the next few days, I'll post a few examples to illustrate these points – as the saying goes – Watch this space!

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STU PHILLIPS
MENLO PARK, CALIFORNIA

Intense Brit, lived in Silicon Valley since 1984. Avid pilot, like digital photography, ham radio and a bunch of other stuff. Official Geek.

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