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.
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 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
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!
Update May 27 2010: Rethinking this two years on, I think this still stands as a rough analytical framework. But I now believe that business model makes sense for the overall discussion above (ie, the combination of all the components), and what I term as ‘business model’ in the post is actually more like the ‘operating model’ of a web business.