Broken Models
Posted by James King at 1:00 03/10/09
In the previous article I mentioned how at FIG we are fans of any “business idea [that] came from seeing a problem and trying to solve it”. We get particularly excited when we see new business models that fix broken models. These are sometimes called disruptive business models.
We are going to mention a few of broken models, but before we get to that, a brief thought on how business models break…
Free markets are, in theory, the catalysts for correction. The concept that supply will eventually meet demand implies that if a new supply of substitute products comes about, that results in diminishing demand for the original products, the supply of the original products should decrease.
For example...
Imagine there are a lot of people want product A (personal CD player) and there are a lot of suppliers of product A (Sony, Panasonic etc.), but then some clever clogs invents product B (an mp3 player) and lots of the customers that wanted product A (CD player) decide they now want product B (a Rio mp3 player)… well, then, suppliers of product A (CD player) either need to make product B (Sony digital Walkman) as well, or make a new/ better product (iPod) to win back the customers, or they change the price of A or they learn to survive on less money… or they go out of business.
Of course the government sometimes decides to get involved. Sometimes out of panic that the market won’t create new jobs or the thought that certain industries are essential to the country’s development. Bold moves can result in the saviour of culturally important institutions, but, they can equally result in the propping up of archaic institutions and industries that should be left to die.
So models can break due to government actions. They can also (and much more frequently) break due to the failure to adapt to new situations. For example changes in technology, available information, consumer attitudes or market saturation.
On to examples of business models we think are due for an upgrade… if you think you can fix them, then get in touch…
Estate Agents
Who do they work for? The seller or the buyer? Sometimes they try to tell you upfront “we work for the seller”… but it is hard to take at face value as there is no distinction. In the book Freakonomics, by Steven Levitt and Stephen Dubner, the motivation problem is highlighted. Here is a summary from openDemocracy;
“More often than not, the house-seller and the estate agent's incentives are misaligned: the seller wants maximum value regardless of time and effort, while the estate agent wants maximum value given minimum input. Considering that the estate agent is the one who will "close the deal", it is more likely that his outcome is the one which will be followed.”
So how do you get value from an estate agent? Should the move be toward selling the house yourself? But then how do you minimise the effort? Should the move be toward “Relocation Agents”?
With great property search engines (such as Nestoria) providing the property hunter with ever more information and websites even offering completely free sales listings (such as tepilo) the traditional estate agent role is changing.
BUT DON’T FORGET – the Internet is not for everyone. Not everyone is on the net… and even if they were, there are still a lot of people who prefer to visit a trusted point of contact and deal with people face-to-face. Especially when it comes to the biggest financial transaction of their lives.
Film industry
I’m not going to bang on about how this model is broken. There are umpteen thousand articles available that highlight how celebs are overpaid, how the studios distribution models are constantly beaten (in speed and quality) by pirates, their slow response to new media and how they produce a load of rubbish that costs them a fortune to make, demonstrating their quality filter as being woefully inadequate.
What I will say is, they should take note from the music industry. Having been dragged (albeit kicking and screaming) into a digital age, the music industry is starting to embrace new concepts of monetisation, from iTunes to last.fm. If the movie makers want to survive, they may well have to take pay cuts and show a bit more of a dynamic response to changes in technology.
There was an article in the Telegraph highlighting how Scarlett Johansson and Mickey Rourke had to take a lowly “$400,000 each, plus a take of profits to appear in Iron Man 2”… the industry really doesn’t do any favours for itself… which is a point that satirists like to elaborate upon.
Fake Steve gives us this little nugget;
“Never mind that the morons who run the movie business have created a high-cost, high-risk business model that any clever child could tell you makes no sense, and that ninety-five percent of what they do involves churning out garbage and praying it sells… They really believe their own hype. They really believe they’re important, and what they do matters.”
And the daily mash offers us;
"And when I read that Shia LaBeouf has moved into a luxury villa, high in the Hollywood Hills, I begin to tremble with rage at the thought that someone, somewhere, has given him money."
This leads us on to other content producers…
Which we will cover in later articles...
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