The collapse of complex business models?

Read Clay Shirky’s latest epistle on the ‘collapse of complex business models’, here. Are the parallels between Tainter’s comments on complex societies and businesses compelling? How would you critique this analogy?

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News on news

We discuss the case of the Guardian Media Group’s foray into e-business in Long Case 6.2. The past few weeks have seen an enormous amount of attention and angst devoted to News International’s proposals – about to be implemented – to put a paywall around the UK Times and Sunday Times websites. £1 a day or £2 a week, after a free trial period. As someone remarked, that’s not far off the price of the BBC license fee in a year. I’m sure that I’ll be writing more about this as the evidence builds up one way or the other about the viability of this model for anything other than niche publications. That aside, a fascinating internal memo has been leaked from the desk of Guardian Editor Alan Rusbridger, setting out his take on the situation – and no doubt seeking to reassure those working on the paper that the correct decisions have been made! You’ll find it below.

Rusbridger Email

The end of the world as we’ve known it … but not just yet

January saw the publication of consultancy firm Deloitte’s annual TMT (Technology, Media and Telecommunications) predictions. Three publications are available for free download in each of the three component areas of the firm’s practice. Whilst generally long on assertion and anecdote and somewhat shorter on detailed evidence, the reports are aimed at ‘starting or stoking a particular conversation’ rather than stopping it, according to lead TMT Partner Jolyon Barker. Of particular interest for me in the Media Predictions report is the more measured approach Deloitte is taking to some of the hyperbolic debates over trends and business models in this area: for example, online vs TV advertising; prospects for e-readers; buzz over 3D TV; the reality of TV/web integration. This is refreshing. It’s not a wholesale ‘out with the old and in with the new’ conclusion, but a recognition that the future of media business models and promotional mechanisms is much more complex and nuanced. The notion that ‘linear’s got legs’ (linear watching of TV according to schedules, rather than wholesale on demand through such vehicles as the BBC iPlayer) is an especially interesting discussion. And the fightback of publishing through the introduction of pay walls and micropayments (although the jury is still out on their acceptability) is also an analysis worth reading.

1984 and all that

One of the retail stories you may have missed late last year was the mysterious overnight disappearance of George Orwell’s 1984 from thousands of Kindle e-book readers. For one US schoolboy who had been working on the novel as part of a homework assignment, it must have come as an excuse from heaven: “Kindle ate my homework”.   But, as you might imagine, the issue has wider ramifications. Kindle has been one of Amazon’s success stories, exceeding the company’s expectations. Device and book download sales combined could, analysts estimate, generate between $1.2-1.4bn by 2010. Kindle can store up to 1,500 titles, which retail for around $10 apiece. A larger, faster DX version was launched in the US in February 2009.

The issue arose when Amazon discovered that the supplier of the Orwell classic did not have the rights to distribute the text electronically and remotely deleted the title. Users hurriedly consulted the terms and conditions of service, only to discover that they had fewer rights over their purchases than perhaps they had anticipated – ‘rented, rather than owned’ was one view. Users also discovered that “the device software will provide Amazon with data about your device and its interaction with the service … and information related to the content on your device and your use of it (such as automatic bookmarking of the last page read and content deletions from the device). Annotations, bookmarks, notes, highlights, or similar markings you make in your device are backed up through the service.”  Journalists were quick to point out the irony that it was 1984 which was the victim of remote deletion: after all, the book deals with the putative ability Oceania’s Big Brother has to re-write history . (‘Amazon is at war with Barnes & Noble; Amazon has always been at war with Barnes & Noble…’)

Amazon was quick to recant: ‘Our “solution” to the problem was stupid, thoughtless, and painfully out of line with our principles. It is wholly self-inflicted, and we deserve the criticism we’ve received. We will use the scar tissue from this painful mistake to help make better decisions going forward, ones that match our mission.’  But, of course, finding out that what we have bought is no longer broadly free for us to do as we want with, and further that it is also trackable by retailers and publishers, is an uncomfortable discovery which raises not just ownership but privacy issues. The rental model for goods and services – other than for the obvious categories such as cars or residential property – is one which is becoming fashionable. (See for example Flexpetz, www.flexpetz.com, Avelle, www.bagborroworsteal.com,  and Erento.co.uk, www.erento.co.uk.) But books are somehow different. Our choice of books and books themselves carry with them an indefinable character which makes them somehow more intimate possessions than most, more expressive of our values and attitudes and indeed of our personal identity. Think how much we can tell about the people we visit from a cursory inspection of their domestic bookshelves! On the other hand, in some respects how is Kindle different from a fee-based version of the lending library model?

Location, location, location

Two developments in the market now mean that location-based e-business services are now ripe for development. These are the growth of GPS capability in handsets and the exponential growth of free of cheap downloadable third party applications and mobile web interfaces being designed increasingly as part of an integrated go-to-market package, rather than as an afterthought or experiment by firms. Analysts Gartner estimate that some 29% of new phone handsets will include GPS in 2009. And at the time of writing, some 100,000 applications have been developed in the iPhone App Store with over 2bn total downloads.

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The real story on newspaper circulation

The conventional wisdom has it that newspaper circulation is in terminal decline, thanks to the Internet. There is considerable debate about possible business models, ranging from free online/charge for hard copy, to charge online/free hard copy to everything in between, including micropayments. It’s always useful to go back and look at the data. Here’s a link to a blog entry which graphs the Audit data for US newspaper circulation since 1990. It makes for fascinating reading. Look at the Wall Street Journal. And the New York Post. What do you take from this ‘longer term’ view?

Can online buck the trend?

Received wisdom would have us believe that if there is a type of retailing that is surviving if not thriving in the economic downturn, it is Internet-based retailing. In the UK, headlines have consistently suggested that savvy consumers have abandoned the High Street and taken to the Internet in their droves to take advantage of cheaper prices and cut-throat competition. However, whilst UK online sales appear to have been consistently stronger over the past few months than store-based sales, they have been growing at only of third of their rate in December 2008. And in the US, the position is even worse: online retail sales actually fell year-on-year by 4.9% in the final quarter of 2008 after a decade of continuous growth (albeit at half the rate of conventional store sales, which fell by a staggering 8.6% over the same period). (See chart.) So those headlines aren’t really giving us the full picture – which is, as ever, considerably more complex. Longer term it may even mean us having to throw out some of our conventional notions of what retailing actually is because of the ways in which some consumers are starting to behave both within and across marketing channels. To understand what is going on, we need to look first at the context affecting non-store sales growth and how our attitudes have already had to change.

For example, the view was once strongly held that clothing would never sell online. In 2000, UK retail analysts Verdict estimated that as little as 0.01% of clothing sales were being made online in the UK. The then chief executive of Marks & Spencer, Sir Richard Greenbury, emphasised the “importance of fit and feel, and the personal input of a salesperson, which can’t be offset by even the best electronic service.”  He was willing to concede that commodities “like white knickers” might sell online – but not other products. He was wrong. Data released by the UK Department of Transport suggests that 38% of all households in 2008 have ordered clothes or footwear online – 62% at least monthly . The Interactive Media in Retail Group corroborates this, suggesting that 30% of UK women now report that they have brought clothes online . And the experience of online retailers such as ASOS confirm that this is a train which is far from hitting the buffers of recession.

Yet, other things being equal, the business-to-consumer firms which employ Internet technologies to reach customers should be just as exposed to the real economy as conventional firms. And fundamentally, the requirements placed upon online retailers by consumers should be no different from those of store-based businesses: creating and sustaining value for shoppers through skilled product sourcing which will earn their customers’ long-term loyalty. But of course other things may not be equal. Store-based retailers have higher fixed costs in relation to their branch networks (including rental and business rates) by contrast with online-only firms, despite the recent fall in rental levels as landlords seek to fill voids and retain existing tenants. The lower transaction costs that online firms are more easily able to generate and sustain may favour them with consumers who will be more price-sensitive during a downturn. On the other hand, much online shopping is dominated by discretionary purchases, where spending is likely to be more at risk. Similarly, most purchases are made by credit card, a form of payment that tends to come under significant pressure during economically difficult times. And current research is also showing that online users are seeking to trim their overall telecommunications costs, along with other discretionary expenditure. Finally, the reality of much of the contemporary retail scene is essentially multichannel: such retailers see these channel differences at first hand as they seek to understand the changing balance of risks and returns from the contrasting routes to the consumer in which they are simultaneously involved. So, for example, whilst US electrical retailer Best Buy experienced a -1.3% like-for-like store sales fall during 2008, its online proposition experienced a 34% growth (albeit from a smaller base). And UK clothing retailer Next grew its clothing sales online by 1.2% in the first 14 weeks of 2009, by comparison with a -2.3% fall in store sales over the same period.

In all this, there is an implicit assumption that existing online or multi-channel retailers are in control of this process. I would suggest that they are incidental (and potentially temporary) beneficiaries of some more significant shifts in consumer behaviour. What are the indicators of this shift? Here are three examples.

  • The significant financial uncertainties of recent months have increasingly favoured sites like Moneysupermarket. Interviewed for the Daily Telegraph at the end of 2008, CEO Simon Nixon suggested that: “People are going to the website as they are basically tightening their belts. Customers are also reviewing what they pay in insurance and utility bills rather than automatically renewing… but customers are more savvy now than they were maybe 12 months ago. They are looking at perhaps two or three price comparison sites. But the market is not very mature and I would say most people will be looking at comparison sites online within the next three to five years.” The growth in the popularity of vouchers and rewards is also indicative of consumer interest: according to Nielsen, 9.8mn UK consumers used a voucher or reward site in 2008, with such sites experiencing a doubling of unique visitors between December 2007 and 2008.
  • Another indicator of the longer term shift is the extent to which social networks are playing a role in a variety of sometimes poorly understood ways in driving retail business, despite – or perhaps because of – their current fashionability. This may range from raising awareness of new products to driving referrals to retailers. At their height (before getting into financial difficulty in 2009) the blogs of Shiny Media (see table) attracted 3.1mn unique visitors each month offering 40 blogs in five categories (fashion, technology, lifestyle, sport and gaming), which included two lifestyle blogs launched in the US in 2007, and a YouTube channel (http://www.youtube.com/user/shinymedia). Commercial blog publishers play a potentially powerful role in creating new product buzz for marketers, but must tread a careful line between blatant product endorsement and spirited independence if they are to retain both the trust of their audience and the support of brand manufacturers in making available new products. Retail and other brand marketers are becoming cannier at advertising on such sites as well as on more conventional social networks. Internet analysts Hitwise reported that UK social networks provided over 7% of referrals to retail websites in March 2009. Retailers like Hotel Chocolat have become adept proponents of affiliate marketing: 25% of direct sales are now driven through this source. Similarly, strong multichannel brands like Mothercare are making investments in social media – such as their Gurgle parenting forum (www.gurgle.com) to, amongst other things, sustain buzz about the brand during the downturn.
  • Finally, though, the economic downturn has stimulated the further growth of new forms of intermediation. As some consumers need increasingly to make ends meet, they are resorting to both selling their own goods (both second-hand and new) online as well as seeking out new and nearly-new bargains. The OXFAM online charity shop made £5mn in its first year of operation in the UK, selling 3,400 women’s tops, from Abercrombie to Armani. eBay’s refocusing of its efforts away from auctions and towards a more conventional online marketplace may have been mistimed, given the bargain-seeking behaviour of an impoverished shopper, although UK eBay traders generated £2bn in sales in 2008. Sites like Zlio.com (“the Internet version of a Tupperware party”), Osoyou.com and aStores (http://aStore.amazon.com) encourage consumers to establish their own stores building upon their own buying experiences, and reward them with commission.

So perhaps in an economic downturn, we’re all retailers now.

Reproduced with permission of Admap, the world’s primary source of strategies for effective advertising, marketing and research. To subscribe visit www.admapmagazine.com.  © Copyright Admap.