Banks and other established sectors are
nervous of the transformative effect of the digital sector. They should.
An interesting phenomenon explains the underlying cause, showing at a
macro level its effects.
When an article,
be it video, voice, code or text is transported over the internet that item has
the economic value around it reduced,
some to zero. It
affects anything that can be digitised and turned into data – products (music,
books, software, media), services (phone calls, computing, ads), items
(professional photography, designs), transactions (money, payment) - and delivered over the internet, distressing the industries around
them. To the internet, they are all plain
data, indistinguishable. Content seems shorn
of its makeup. A different business
model can then be applied and thus the rise of WeChat, Netflix, Amazon.com displacing
the traditional voice providers (telcos), tv and bookstores. It even affects sectors that can be
‘informationalised’ as with AirBnB ‘hotels’.
While categorised in the hospitality sector, AirBnB is really an
information business - it owns no physical assets, its assets is
information. Truly, we’re in the
information age.
Aereo (now defunct from legal challenges) seems to use this
principle in its business model powerfully to stream tv over the internet, in
the process reducing consumer cost. Like
Napster’s innovation bringing the peer-to-peer
model (storing songs on consumers’ PC) to
music and similarly neutered but re-birthed in different forms, the Aereo
model may return.
In the
process, there is also unbundling;
there is a separation of content from delivery.
Datarisation affects distribution.
A radio station doesn’t need its transmission towers. Banks don’t need their ATM networks and
telcos of their telephone networks to deliver phone calls. Such traditionally integrated industries
re-structures as a result. With their
loss of control over distribution, they will also lose control over the
ecosystem. Once muscular in their
relationship with partners they now need persuasive skills.
Further, its parts can be broken up.
Classified can now exist on its own from the rest of the newspaper. Cable bundles in the cable tv industry
unbundles. Fixed line phones are
optional at home.
The economics of
the affected industries transform.
The high distribution cost is replaced with
the cheaper internet, reducing input costs.
But highly profitable parts, like cable bundles are threatened. Phone calls 20 years ago made up 99% of
telcos’ revenue, now a fraction.
The value of datarisable products changes. Voice conversations and messaging now has worth
(when mined) even as phone call charges
collapse. Prices of movies and music
are affected since discovery (search, recommendations by online providers, sharing
on social networks) and distribution costs are lowered (internet) while reach
is potentially higher (global internet).
Supply is also affected by the democratization of content. YouTube, the popularity of user-generated
videos and freebooting affect demand. Similarly
software can now be made through crowdsourcing which means they’re offered free.
Rules that apply
to the digital economy are foisted upon them So are the operating models and the culture
of doing business online. In many
cases, it differs greatly from conventional business models.
“Unlike hotel and
taxi companies that seek to constrain supply to keep prices high, Airbnb and
Uber are creating structural assets that appreciate in value as they attract
more and more new hosts/drivers (i.e. supply) and travellers (i.e. demand) to
their platform, leading to the ultimate network effect.”
The middlemen industry, the mainstay of commerce
is rapidly being dismantled as the internet facilitates a direct model. It’s not going away but layers are reduced.
Competition
increases since it’s now borderless but so too the opportunities. One change is customer service. Once mostly a lip service it’s now reframed
as user experience and moved to the top of business strategy ala
Amazon.com. Competitors are now
literally a click away.
The peer-to-peer model is particularly
impactful. It’s destroying the business
of traditional phone calls. A person
making a call to another is a person-to-person process. Since the internet allows this to be carried
out directly via mobile apps (WeChat), it bypasses the traditional telephone
exchanges. And in its basic form,
banking is about a party lending to another via his deposits which is used as a
loan. It mirrors a p2p transaction, thus
startups using this to replace some functions of the banks such as (p2p)
lending, currency exchange and payments.
In fact the entire sharing economy, started by Napster and based on p2p
is a huge and emerging economic sector, not only in terms of revenue but in
efficient use of assets and productivity.
Besides disrupting the software industry,
the open
source model brings new management principles. Lean management and agile derives from the
open source process. It also improves
product development, provides a mechanism to track trends continuously and
inputs customers’ wants in situ.
Let’s now look
at the effect of datarisation on three industries.
Napster advanced
the digitalisation of music and in the process caused the price of music to go
down. Music shouldn’t be free but
datarisation reduced the cost of distribution and increased reach. Likewise the tv/movie industry is
transforming right before our eyes but it’s still early days. Datarisation says prices will continue to
fall.
With traditional
voice calls datarised and thus revenue disappearing, telcos are being
transformed. Very simply, the future
telco is the ISP. Somehow I don’t think
the incumbents see it this way. Instead
of innovating in the new internet economy, they seem more interested to turn
the internet back to the old telco model where they control the ecosystem! Datarisation suggests that’s not going to
happen.
Datarisation of software means it’s really
a services business now in the form of cloud computing and open source
software. We are witnessing re-sizing of
the current giants of the traditional industry.
Any product that
can be datarised will see its industry affected.
@tommichen7
©Thet Ngian Chen,
internetbusinessmodelasia.blogspot.com (2012, 2013, 2014, 2015). Unauthorized use and/or duplication of this
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