Recently I was asked to talk about (1) innovative business models in the (2) media sector and to work out possible (3) disruptive consequences for the market participants. Perhaps the most important point in this context was the question (4) how a university should react to these developments in terms of didactics and curricula. This is what I delivered at a public lecture in 2018 at Macromedia University in Munich.
(1) The essence of business models
Let us start with business models. What is a business model? Osterwalder describes business models as „an abstract conceptual model that represents the business and money earning logic of a company“ (Osterwalder 2004: 15). Business models are therefore not the core or the basic idea of the business but rather a representation of the strategic approach to aid the implementation of the strategy in daily business.
Therefore, when we talk about innovative business models, we are not talking essentially about models, but about strategies. Strategies can be defined by different properties.
- They apply in the medium- or long-term range
- They depend on goals
- They aim for achieving competitive advantages (or more simply: beating the competition)
When it comes to competition, the question is always about relative advantages. Who wins the battle for the customer? Who has what kind of access to the market? Who has the best position in terms of costs and / or prices? In market economies, where access to the market is only marginally regulated, such relative advantages arise out of the value that customers attribute to a service.
How to create value for customers? Philip Kotler answered this question in his Generic Marketing Concept. Four groups of activities create value for the customer (cf. Kotler 1972: 52):
- Configuration: Create an attractive benefit bundle
- Facilitation: Make it easy to get and easy to use
- Valuation: Offer terms and conditions that fit to the individual willingness and ableness to pay
- Symbolization: Add meaning and create symbolic significance
I believe this concept works the same today as it has in the last 50 years. It works because it is essentially based on competition, and this is nothing more than a strategy that has been proven to work effectively over time.
But the times are changing. We are no longer living in the plain, old industrial economy. With the development of the Internet the structural conditions between suppliers, customers, and markets have changed. In the logic of industrialization, the logic of the old economy, value results exclusively from the activities of the company. The company produces value and offers this value in the form of products at prices that are results of the market mechanism.
Today we are living in a network economy. Today the market is no longer just the place where we observe and set the value of services in the form of prices. Today, the market is the place where value itself is created. Value today is a result of co-creation by the interaction between customers and suppliers (cf. Prahalad and Ramaswamy 2004: 11). The first observation is: We are not just talking about how to make money. We have to talk about how to create value and how to take advantage of the interaction with customers.
(2) Today every business is a media business
Let’s talk about the media sector next. What is the media sector? Publishers, broadcasters, artists, infrastructure providers? Communication sciences do not really help us to get along with this question. Communication sciences understand media usually as mass media: radio, television, newspapers and magazines, books, music. That’s all? No, that’s not all. The biggest media companies today are Alphabet, Facebook, Amazon, Apple, etc. They have nothing to do with mass media in this narrow one-to-many understanding. They are social media (one-to-one or many-to-many), they are platforms, and they are infrastructure.
The media sciences prominently represented by works of Harold Innis, Marshal McLuhan, and Neil Postman is somewhat more radical and interprets media as extensions of man or media as environmental conditions of human beings. However, this approach also does not help us in the economic application. What about the development of new smart cars? Where the software is more important than nuts and bolts? What about smart homes, smart networks, the internet of things, industry 4.0?
In my opinion, today all companies are media companies. Every company is, to a certain degree, a media company, regardless of whether it is part of branches like mechanical engineering, health care, tourism or the movie industry. If each company is a media company, we should no longer speak of the media sector (or the TIME industry). It is more useful to follow the approach of Varian and Shapiro, to speak of the information economy, and to define it clearly: information is „anything that can be digitized“ (Shapiro and Varian 1999: 3).
If we accept there is not one single media sector but that all companies today are part of the information economy, which is based on the digitization of the media, this leads to a second observation: It’s not about the media industry. It’s about the entire economy, which today has to hold its own in a networked information society. The new currency in this economic environment is data and content. It is not about the media sector. It is about the economy that uses data and content to create value.
(3) Innovation is not just about disruption
Let’s get to the third point. What about disruption? Christensen introduced the concept of disruption in 1995, and he drew a sobering conclusion 20 years later: „Many researchers, writers, and consultants use ‚disruptive innovation‘ to describe any situation in which an industry is shaken up and previously successful incumbents stumble. But that’s much too broad a usage“ (Christensen et al. 2005).
A disruptive innovation is a special kind of innovation that allows a smaller company to successfully challenge an established company by creating a new market segment or addressing a low-end niche that is not currently serviced by the established companies. Using this definition, Christensen analyzes that e.g. Uber is not a disruptive business but just an innovator focusing on better prices for customers that already use taxi services. The same applies to Tesla, who attack in the luxury segment and therefore, according to Christensen, are not disruptive, but simply innovative.
The idea of disruptive innovation is that a company (the disruptor) addresses new customers that were not using the existing offers so far. From this initial situation, the disruptors grow into the mainstream and only then, they are able to change the conditions of the market, as Netflix did in the movie business: From a small DVD by mail video library in 1998 to a streaming service. That has changed the model of linear distribution of video material fundamentally.
Because disruption is not concerned about products, but to processes it takes time to see the effects or results of disruptive innovation. For this reason, it is difficult and hardly possible to forecast disruptive consequences for the established market participants in detail. On the general level, however, we can make clear statements. Disruptive changes in the information economy come mainly through technological change. Speech recognition and speech control is an important development, which will have far-reaching consequences. The same is true of virtual and augmented reality technologies.
But apart from the disruptive changes, we should not lose sight of the fact that classic innovations are emerging in the content business (news, books, films, games, music, pictures, etc.) that significantly enhance existing consumer demand through improvements.
I want to summarize my third observation as follows: It’s not just disruption that matters. It‘s about innovation in all dimensions. These innovations can be disruptive addressing new customers or carving out a new niche. However, these innovations can also be improvements to existing products in terms of better configuration, better pricing, better facilitation, and better symbolic power. It is all about better user experiences.
This leads to an interim summary that focuses on innovations in the use of data and content in order to create more value for customers. This is what we want to do finally: Create value by using data and content in a new way. And for this particular reason it is helpful to have a look on general business models in the information economy.
(4) The three tiers of making money in the information economy
Basically, there are only three ways you can make money with content and data. I call them the three profit tiers in the information business.
- Tier 1 is to sell the information. This is what we know from book publishers, newspapers, pay TV, real-time stock exchange rates, market research data, etc. The value of information alone motivates customers to spend money.
- Tier 2 is to use information to reach people. Free-to-air TV and radio, customer magazines, blogs, search engines, social media networks, etc. give us access to audiences, which we can monetize in terms of target groups.
- Tier 3 is to use information to trigger follow-up transactions. This happens, for example, when e-commerce providers like Amazon or Booking use content to attract potential customers, or when music publishers use recordings to bring people to the concert shows. Recommendation systems, licensing and syndication, merchandising are well-known fields of application. However, there is more. It is not only about economic transactions, but also about social transactions. Such a social transaction is influencing the public opinion forming process. This is what Donald Trump does by directly talking to his supporters without the press as an intermediary.
Innovation that creates value that is based on content is very compatible to these three profit tiers in the information business. The value creation process deals with the question: „how can we win the scarce attention of people?“ The tiers of information business deals with the question: „how can we take advantage from the use of data and content?“
In the end both perspectives lead to the same insight: There is no such thing as a free lunch. Someone has to pay for content and data. Sometimes it is the user himself. Sometimes other companies want to reach these users and they pay for the access to a target group. Sometimes content and data comes from organizations that aim for different, not only economic goals. I want to give you three examples on that.
Media business models in action
Let us start with an almost historical case. In 2006, I was responsible for Buhl Data Service’s product segment route planning software. We sold around 250,000 pieces of the D-Route and D-Sat products each year, generating sales of EUR 6 million. Then Google introduced Google Maps in Germany. Our business was reduced to zero within two years. Google Maps was disruptive. We may call it a big bang disruption (cf. Downes and Nunes 2014). It started at the bottom of the market. It initially aimed at broadband customers and did not yet have routing functionality. However, that changed quickly and within a few years, the whole market had been re-formed. At the beginning, as an incumbent provider, we did not even realize Google’s market entry. But when we realized it, it was too late.
A change in the business model may create a disruptive innovation
The exciting point for me, however, is not the fact that a technology-driven innovation has changed the market. Google created new value for customers through making the map available online, that’s right. However, the point is that Google owes its success largely to a changed business model. Printed maps, GPS handheld devices, and route planning software work on tier 1: They sold the content. Google operates on tier 2: They sell the reach they get from users and they generate data they use to optimize their advertising model.
Today I am myself a publisher with the GPS Wanderatlas and we work with maps. Nevertheless, no one would ever have the idea to sell the map itself. Rather, it is about localized content, which is produced by the editor (i.e., this is costing us money) and offered free of charge to the users. The money comes from the local businesses, that want to reach a narrow and well-defined target group – and from Google, who play out their advertising service on pages like ours.
No more use for information intermediaries
Cut. 10 years later. What can we learn from the US election campaign 2016? A candidate who is not supported by his own party. Almost all major news houses are against him. He has no facts, no experience, and not even a vision. He has only a claim and the unfiltered access to people who believe him to be a Messiah. Will it work? Most people said no. However, we know it worked. What is this case telling us?
For the last 100 years, the political world is the game zone of news media. The news report on facts and figures, they interview the political representatives, they draw conclusions for their readers, listeners, and viewers, they comment the world as it is. Today we have to admit that is not necessarily the case anymore. People want news. But they want news that fits to their beliefs. We found a new label for this development and call it post-factual. Frankly spoken this is not new at all. What is new is the market environment. News is not a scarce and therefore valuable resource anymore. The scarcest resource today is attention. If attention is the limiting factor it is clear that people tend to devote their attention to things that fit to their personal experiences and attitudes.
Why do I talk about this? Because it basically explains the problem of news media. The problem is not that content is for free on the Internet. Content has been free for decades (television and radio services). The problem is that many people are not interested in getting that old-style kind of news that traditional broadcasting services and publishers deliver.
Getting back to the idea of the three tiers in information business, we can explain this by a shift from tier 2 to tier 3. Persons and organizations, parties and companies, any kind of social group can directly spread content without intermediaries. New groups are rapidly developing thanks to the possibility of „organizing without organization“ (cf. Shirky 2008) and they reinforce one another in their attitudes towards the world. All this happens without the need of making money with this kind of content. Imagine that just one German based fashion retailer – Zalando – has 700 people on their payroll for producing content (cf. Pfannenmüller 2017). This is the disruptive situation for the news business. Except for real crises with high uncertainty and emotional participation, the agenda provided by news agencies has little relevance to the everyday life of the people, as one can look at the sharing charts like 10000flies.com. The value of independent, journalistic work is too low to stand up against the many free and alternative financed offers.
From eyes to ears: The loss of self selection
If we now make another ten-year leap in the timeline from 2016 into the future: What comes next? Probably the world will change as fast and radically as it did in the last three decades. One of the trending technologies today is voice processing powered by artifical intelligence systems. We get a first impression of it by using Amazon’s Echo with the Alexa service or maybe using Google Now or Apple’s Siri.
What if we get used to the situation that algorithms and artificial intelligence determine what content and data we receive? Who will set the rules: which news sources are reputable, which music is top, which movie trailers must be seen? Now is the right time to develop offerings for these new platforms and take advantage from the technological shift that is right now going to happen. After we switched from stationary to mobile, maybe the next step is the switch from visual to auditory content, the switch from social media platforms to messaging platforms, the switch from search engine logic to personal recommendation logic?
Whatever happens, I think one thing is quite clear: It is extremly unlikely that people will pay more for news in the future. The opposite is right. Regarding entertainment content like music, fiction, movies, and games it is the same. The chance to make money on tier 1 will drop. It is getting harder to make money on tier 2 alone, no matter how intensively we use distributed content. Access to people becomes more difficult for the media, not easier.
What does this mean for working on innovations regarding the value creation process in the information business? I will tell you my perspective on this issue in the last part: the consequences for the education market.
(5) Perspectives for the education market
When we talk about education, we are talking about two different things. Education as a process and education as an outcome. Let us look on the educational outcome first.
What do young people expect from their studies? To put it bluntly one might say: Having a good time and in the end receiving an access-to-all-areas pass for their career of choice. In my talks with applicants, I have never heard of a young person interested in studying just to understand the spiral of silence or to discuss Simon’s scissors. It is only the broad subject area (business, psychology, law, medicine …) and the degree that count.
What is the value of higher education in general? It offers a service that, with the substantial participation of the students, leads to a single sheet of paper that documents the achieved degree. The product „education“ is frankly spoken substitutable between the various universities. Relevant differences are merely the location and size of the university – what is an aspect of facilitation, but not even a sharp one. With regard to the price point, there are two groups in Germany: state offers for a yearly fee of less than 200 Euros and private offers for a yearly fee of around 5,000-10,000 Euros.
The operating expenses for teaching also differ significantly, but exactly into the opposite direction. Here public universities of applied sciences pay 6,490 euros, private only 3,890 euros per student and year (cf. Buschle and Haider 2016: 82ff.). Looking at these numbers, one could assume: pay more, get less!
So again, what is the value of universities for the students? What is the value of private universities in a highly-developed education market like Germany? In my opinion, a response aims in two directions: The product itself must deliver on a clear and distinctive value proposition. And the product must stand for more than just the degree. Only the graduates themselves can solve the latter by becoming active brand advocates. They will, if the product is fascinating.
Therefore, we have to focus on the value proposition itself. What is the service universities deliver to their students? They provide lectures that are highly structured by the curriculum. What happens in the lecture room? A lecturer presents information to students. This is pure information business. It is about providing content to students and then checking whether the students can reproduce this content. You can purchase this service for 200 euros a year at well-known public universities. Alternatively, you can buy this service for thousands of Euros a year at small-sized and young universities where you do not even know if your institution will still exist in 10 or 20 years.
In my eyes, the answer is not to transform the service to a hybrid approach where parts of the service are delivered digitally. This may improve a university’s costs situation but it will not improve the student’s value experience. Compare it to music. If you want to experience a concert, would you buy a ticket and go or would you prefer to watch a video? There are many countries where there is a great need for university infrastructure and where it is enough to build an institution to meet demand. But this does not work in a mature market.
We have to create more inspiration. We have to create more application of scientific results as we know it from art schools. If young people decide for a university of applied sciences, they decide against research, they decide against the pure transfer of knowledge. They don’t want to know it. They want to do it and then they will work on knowledge because they understand in the application that knowledge helps them to do better. What we need is a shift from teaching to learning, a shift from participating to experiencing.
If we want to create value that is worth thousands of euros a year, and if we admit that the students are an important co-creator of this value, we have to rethink the curricula coming with modules, single courses, and well-defined learning outcomes that make us nearly 100% comparable to the public suppliers of education.
I would recommend a strategy that completely transforms the linear course-oriented approach to a system, where learning projects are the norm and not the exception. From the process perspective, this means that students should spend much more time on the campus, working on real problems day and night like in a start-up atmosphere. The professors take the roles that coaches have in sport. They deliver scientific insights and give tactical advice. The professors needs assistance for this job by a broad academic mid-level faculty, in terms of headcount around 3-5 assistants per professor. These assistants work closely with the students. Per semester you would not have 5-6 modules coming week-by-week. You would have 2 or 3 projects where students apply scientific results over a period of let’s say 4 weeks each. This will lead to a study that is both an inspirational experience and an ambitious training and preparation for the real world.
If we can manage to co-create value that is not only priced at thousands of Euros, but it’s worth thousands of Euros, then private universities will succeed and outperform the public ones. Graduates will succeed in the job market, they will become brand advocates, the industry wil partner with these universities and fund them partly, too. Prospects can be invited to the projects to see that private universities are different.
A last word to the three profit tiers that we know from information business. As of today, private universities in mature markets have a hard time. The competitors have a different funding, which allows them to offer their product nearly for free. I deeply believe that there are many opportunities to redesign the pricing of private universities regarding the individual willingness to pay. We can learn this from the airline industry; we can learn it from Google. It will take too long to discuss this in depth because it depends on many organizational details. However, I think the starting point is that private universities in mature markets have to significantly change their product configuration. It’s not so much about disruption. It’s about improvement. If we can manage to design and implement a didactic DNA that proves day by day the value of private education, we will have the chance to make an impression in the market. Don’t just go big. Go for big goals. Be the one who changes the world.
Buschle, Nicole and Carsten Haider (2016): Private Hochschulen in Deutschland, in: WISTA Wirtschaft und Statistik 1/2016, pp. 75-86 (https://www.destatis.de/DE/Publikationen/WirtschaftStatistik/2016/01/Wista_1_2016.html)
Clayton M. Christensen, Michael E. Raynor and Rory McDonald (2005): What Is Disruptive Innovation? https://hbr.org/2015/12/what-is-disruptive-innovation
Downes, Larry and Paul Nunes (2014): Big Bang Disruption: Strategy in the Age of Devastating Inovation, New York: Penguin
Kotler, Philip (1972): A Generic Concept of Marketing, in: Journal of Marketing, Vol. 36, April, pp. 46-54
Osterwalder, Alexander (2004): The Business Model Ontology. A Proposition in a Design Science Approach, Lausanne: University of Lausanne (http://www.hec.unil.ch/aosterwa/PhD/Osterwalder_PhD_BM_Ontology.pdf)
Pfannenmüller, Judith (2017): Das ist der Zalando-Code, http://www.wuv.de/marketing/das_ist_der_zalando_code
Prahalad, C.K. and Venkat Ramaswamy (2004): Co-Creation Experiences: The Next Practice in Value Creation, in: Journal of Interactive Marketing, Vol. 18, No. 3, p. 5-14
Shapiro, Carl and Hal R. Varian (1999): Information Rules. A Strategic Guide to the Network Economy, Boston: Harvard Business Review Press
Shirky, Clay (2008): Here Comes Everybody. The Power of Organizing without Organizations, New York: Penguin