Business Models in a Digital Age

I guess there’s a saying out there that in every generation there’s at least 1 major technological advance which tosses an industry’s business model on its head. I think for the generation of people that grew up around the ascension of the Internet, that’s the qualifying technological advance. Last week I posted about the ridiculous nature of the recent MPAA’s “piracy” statistics. I’m guessing they released those stats as an ongoing attempt to sway public opinion and/or political support in their direction. The problem with their approach, besides the fact that their numbers are complete junk, is that they’re attacking their perceived problem from the wrong direction.

During the pre-internet days, a number of businesses in content industries (music and movies primarily) focused their efforts on being a gatekeeper, connecting buyers and sellers. The internet has allowed content creators a medium through which they can easily distribute their work at a cost well approaching zero, allowing many more creators and creative works to exist. The downside, for the creators and gatekeepers, is that once the creator has distributed the work just once, they lose all distributional control thereafter. People can make copies of the works and share them with anyone and everyone. The internet has turned traditional businesses built around certain types of scarcities on their collective heads, and many are struggling to adapt.

There are only a few ways you can try to adapt. You can try to fight the tide by using the courts to enforce your copyrights (exclusive right of distribution), lobby Congress to pass laws reinforcing your business model, or follow the tide and alter your business model to fit the new market landscape. The RIAA tried the first way. They launched a massive campaign and began suing individuals in court. While their methods were ethically and legally questionable, their intent was clear -- put the genie back in the bottle and stop people from sharing music. Eventually, they gave up on that approach, finally realizing what a waste of time and resources it really was. Most content industries have been lobbying Congress for decades, but they haven’t been very successful as of yet lobbying Congress to pass laws regarding file sharing. The third option holds the most promise for long-term success -- give people something they want, and they’ll be willing to pay for it.

Since pricing and value is somewhat a product of scarcity, continuing with a business model attempting to overcharge for an essentially unlimited product will inevitably leave you in the poor house. So what’s a struggling business to do? You determine what is scarce that people might be willing to pay for, deliver the maximum value for that scarcity, and charge accordingly. In movies, perhaps you show the movie and then have a Q&A session afterwards with a person from the film. That’s what Kevin Smith did with his movie Red State. If you’re in music, perhaps you release an album and allow the consumer to decide what to pay, or even go beyond that and give away the music for free, making your money touring. Radiohead and Prince followed that route and by all accounts were more successful than almost anyone expected.

The fact is file sharing isn’t going away, and the reality is businesses will have to compete with "free". Businesses can fight against it or adapt. It would seem those that adapt and find ways to offer the most value to their customers will achieve greater long-term success than those who fight against it.