16 Jul 2012

The digital business model experiment

Disruptive innovation. In the last decade information industries such as music, film, videogames and books have been severely affected by Internet broadband and MP3 technology. Those innovations have changed consumption habits. Revenues are decreasing while demand for content is increasing. This paradox is especially acute in music and movie industries, and is usually explained by the presence of illegitimate File Sharing. Major firms in those industries are analysing new business mechanisms to recover revenues. For example in music industry iTunes (Pay as you go business model) and Spotify (Pay monthly business model) are performing relatively well. 

Is there an optimal business model in the digital era? In the 80s and 90s major companies and producers exploited one business model that was clearly the optimal one. The music industry was based on CDs and the movie industry was selling the content in three stages: Cinema, VHS or DVD and television. With the current situation there is not a clear business model anymore. In our last piece of work in the music industry research group (Glenn Parry, Oscar Bustinza and Nich O’Reagan) we analyse empirically the business model composition in 32 countries for the period 1998-2008. In empirical terms the variable business model is measured with a Herfinahl index and uses data on revenues for the 22 formats available. The index takes maximum value of 10 when there is only one format and tends to zero when there is full heterogeneity of formats. During the period analysed this index tends to decrease. Notice that at the beginning of the period analysed the CD was a dominant format, while during the first decade of the 21st century some other formats start to be relevant. The link between our measure of business model and sales per capita is quadratic. It takes a U-shape form. So, empirically two-business model seems to be predominant: (1) Product-centric and (2) fully diversified multi-product. The article that contains this analysis (among others) will be submitted soon to Strategic Management Journal

The experiment. There are few examples of big movements in information industries in the last years. Changes are marginal and movement from product-centric to fully diversified multi-product is usually slow. Some lobbies (that pursue maintaining their dominant position in the traditional business models) difficult a fast movement. In the case of the movie industry cinemas wants to maintain their privileges and keep the exclusive right to exploit movies during the first weeks of projection. In addition, major producers do not want to risk their usual channels of commercialization. In order to experiment for a faster movement we need an independent film in which majors producers are not involved. This happened last week with the opera prima of Paco León (Link). He decided to sell the film “Carmina or Revienta” in all the formats available (Cinema, DVD, iTunes, internet platforms, TV platforms) at the same time. It gives the consumer the right to pay the price that fits better to their taste and budget (2 euros in internet, 5 euros the DVD, 8 euros in the Cinema). Paco León, director and producer of the movie, invested approximately 100.000 euros and 11 days in the production of the film. He did a market research using his followers on twitter and identified different requirements and necessities that should be covered with the exploitation of different formats. For example, people living in rural areas, far from cinemas, could enjoy the movie in Internet. The results are far from being conclusive but the film generates in revenues more than 100.000 euros, the amount invested, in the first weekend (Link). In particular the film sold 4.500 cinema tickets, 11.000 DVDs and 17.500 Internet downloads. It generates approximately 125.000 euros. Methodologically, we may acknowledge an important limitation to evaluate the performance of the experiment; mainly we do not have a comparison sample. However, the results suggest a moderate success, and therefore at some extent invite producers to implement a full diversification of formats. 

Conclusion. Our evidence suggests that, in the current situation, diversification in information industries (dominated by digitalization) may help to recover revenues. The idea behind this result is that consumers are segmented and choose the product or service that best fit their requirements. More evidence is required so let’s hope more producers start to propose new and original business models. In this regard I want to thank Paco León for taking risks and try to implement (and test) new business models.


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