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Business Model for Other Information-Rich Industries?

Technology has rocked the business model for anyone delivering information content. Over the past three Conversations in Ethix we have examined what has happened in three such industries: the businesses of movies, television, and books. There is a similar case for newspapers and music. It is not just a question of reduced profits. The issue is how these reduced profits may undermine innovation and choice in these industries. We will start by reviewing what we have learned about these industries, but then raise the question: What are the other industries where the delivery of information will fundamentally change the business model?

Movies

The movie industry had developed a profitable niche from the sales of DVDs. Unlike movies in the theater (where revenues are split with the theater) or on television (where revenue is split with the network or cable), DVD sales were very profitable because reproduction costs were small and the studios did not need to share the revenue with others. But this revenue stream has been impacted for two reasons, both based on technology.

An increasing number of DVDs have been replaced by streaming video over the Internet, made possible by today’s higher bandwidth networks. One sign of this change was Blockbuster filing for bankruptcy April 26, 2011, after years of declining sales. Another is the much smaller displays of movies at places such as Costco.

The technology also has affected the business model for movies in another way: The Internet has opened up the piracy market. First-run movies are copied with hand-held devices at the theater, and quickly find their way to the Internet. Pirated versions of films are produced through sophisticated manufacturing systems based in countries with weak piracy enforcement. Professional packaging, made to look real through publishing technology, makes these copies look official.

There is no obvious replacement source for this lost revenue for the movie industry. This was the discussion topic in our Conversation with Darcy Antonellis, president of Warner Brothers Technology Division.

News Through Television and Newspapers

The business model for delivering news through television, and similarly through newspapers, used to be fairly simple. Professional journalists would gather the news, and its publication would be supported by advertising revenue. The sources were limited. On television in America there were up to 13 channels, with news coverage focused on the three major networks, plus a public network. In Europe the choices were even less. Similarly, each town of almost any size had its own newspaper. As with television, news was gathered by professional journalists, and they were supported by advertising in the newspaper.

Again, technology has changed the model. The number of sources for news has increased dramatically. For television, the 13 channels have grown to hundreds. For newspapers, the sources have grown to every blogger and every website. This dramatic increase in sources undermines the revenue model for each individual source.

But the business challenge is much greater. When television and newspaper content can be viewed online when the customer wants to see it rather than when the provider chooses to display it, there is a demand for much more frequent updates. In competing to “get there first,” there is a danger of undermining trust by failing to fully validate the information. Further, the consumer can ignore the ads, “fast forwarding” through television commercials.

This leaves many questions. What does this mean for the business model for news? And what does it mean for a society when people pick the sources they agree with rather than get exposed to a broad cross-section of viewpoints? This was the subject of the discussion with Rome Hartman, producer of Rock Center with Brian Williams on NBC, and former producer of BBC America and 60 Minutes.

Books

Similarly, the business model for books is under siege by technology on many fronts. Who needs a bookstore if we can order books online? Who needs a physical book if we can download an e-book? Who needs a publisher if anyone can self publish? Will people even read books if their attention span continues to shorten due to expectations created from the Internet?

We discussed these issues with Tami Heim, former president of the now defunct Borders Books.

Music

When Napster created its file sharing capability in 1999, people began to freely exchange music. Copyrights were ignored. Though legal challenges effectively halted Napster in its early form, the music business has not been the same since. The role of the music store was rocked much like the other industries we have discussed. Self-publishing available through YouTube raised the question of the role of the record label. Apple came along with its iTunes model and created some semblance of stability for the distribution of music. But since an artist must sell songs one at a time, rather than packaged in an album, the music industry remains a fraction of what it was pre-Napster. Roger Eigsti commented on this in his NewsNotables column.

Other Industries

If technology can so change the business model in these information-rich industries, what about other industries? Many could be considered, but let me briefly comment on two quite different “businesses” that fundamentally depend on the dissemination of information: education and banking.

Education

Mortimer Adler, a 20th century professor, philosopher, and writer famously said, “A lecture has been well described as the process whereby the notes of the teacher become the notes of the student without passing through the mind of either.” There may be no better description of a process that can better be accomplished through technology! Who needs the professor, the classroom, and the high tuition costs?

When this is the way education is carried out, then online education is probably the better answer.

And it is not just the process, but also the outcome. If the net value of an education is a piece of paper signifying a degree granted, and if the goal of a degree is to get the job requiring a degree, then this is the natural direction. Because many professors deliver content as described, and many students only want the paper for the job, we can expect education to pass through the kind of turbulence that we saw in the media world.

But education is much more than this. The relational content of education cannot be duplicated online, at least not yet and not fully. And the purpose of an education is greater than the piece of paper. A good education prepares the student for a lifetime of learning, not simply for a job. Universities will continue to redefine themselves, and student expectations will continue to be developed. But as long as tuition continues to escalate, pressures will grow on education.

Banking

Banks continue to use technology themselves, encouraging more online banking, discouraging customer contact. I well remember when my daughter’s bank offered her an account that would encourage her online use by penalizing her if she talked with a person in the bank. With this direction, however, banks must recognize that when banking is completely impersonal and online, then any bank will do and price is all that matters. Consolidation will continue.

Isn’t banking, after all, simple about the transfer of money, and isn’t money simply another form of information? Is there a role for relationships in banking, or is that merely a vision of the past, of movies like It’s a Wonderful Life?

Gloria Nelund, the subject of our current Conversation, points out that banking is, or should be, much more than the information content. Relationships are needed to assess character, and character should be at the heart of who ought to receive a loan for growing a business. The push to only online banking may be efficient for the bank in the short run, but does it work for itself and for its community in the long run?

Conclusion

Perhaps the relational content of education and banking provide a different problem for these industries than for the media industries. Of course the media industries are also relational. But the business model for the distribution of content seems to have far less relational content in that particular area, and that has become the economic challenge. How industries that are doing more than distributing content, but have ignored that part of their business, will thrive through the technology age remains open to question. And I am certain that there are many more industries than banking and education that are now struggling with this.

I learned a lesson about computing in a business context a long time ago. It is not about automation, but about transformation. Neal Postman said, “When you add technology to a system, you don’t get the old system plus technology, you get a new system.” The more information rich an industry is, the more this distinction is apparent.

Leaders of industries need to continue to learn how to posture their businesses to address the changing requirements and needs of their customers. Technology adds a significant challenge to this requirement.

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Al Erisman is executive editor of Ethix, which he co-founded in 1998.
He spent 32 years at The Boeing Company, the last 11 as director of technology.
He was selected as a senior technical fellow of The Boeing Company in 1990,
and received his Ph.D. in applied mathematics from Iowa State University.

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