Killing offline businesses online
Jul 03, 2013
Table of contents:
As each year goes by, the Internet is continuing to become ever more important in the lives of people all around the world. Prominent Venture Capitalist Marc Andreesen has famously said, “Software Is Eating The World“. As more and more industries are impacted by the rise of the internet and software begins creeping into traditional processes, it is looking increasingly likely that Marc’s prediction may come true.
When big economic shifts like this occur, it presents a huge opportunity for people who are in the right place, at the right time with the right skills and experience. If you look back to the expansion of empires, the Industrial Revolution and the birth of the personal computer it is not a coincidence that some of the wealthiest people in history were prolific during these periods.
As old offline companies struggle to find their way online, it presents a huge opportunity for them to be replaced. When companies can’t evolve, they die. If you are reading Culttt, you probably already have the skills and experience to exploit this opportunity. This is the start of the next revolution.
Two very different problems
Both online and offline businesses are facing two very different problems. As mentioned above, offline businesses in just about every industry are struggling to adapt to life online. The Internet is significantly lowering the costs of doing business, which make offline businesses unable to adapt their cost structure. When you fundamentally change how a market is approached, it can be extremely difficult to adopt those changes into an existing organisation.
Marketing and distribution are also two other huge reasons why offline businesses are struggling to compete. Online marketing is a world apart from offline marketing, and distribution is now on a global scale.
Disruption of cost structures and new paradigms of marketing and distribution mean that a new startup with very little cash can start to disrupt huge global companies.
However, online businesses are also clearly struggling too. When you look at the most common online business models, you begin to see that many companies are clearly going after the wrong goal.
A lot of online businesses are pursuing the wrong business model. Advertising and subscription business models are already heavily saturated, yet more new companies are popping up every day. Whilst both these business models are completely legit ways of building successful businesses, the weaker companies who have tried to fit their business into that model won’t last long.
The important thing to remember about disruption is, it is very unlikely that technology will play a pivotal role. The fundamental business model itself often rarely changes either. Instead, disruption occurs when someone takes off the shelf technology and reorganises the market.
The opportunity is therefore, take your existing skills and knowledge of how the Internet works, and reconfigure offline business models to take them online.
Incumbent offline companies are going to struggle to adapt to life on the Internet, and many of them will be unwilling to cannibalise their existing cost structures. Instead of struggling to fit your company into one of the saturated online business models, how can you reconfigure an existing business offline model and bring it online?
The three big areas to think about are the business model, the technology and the market.
Business models
In the coming years, there are going to be millions of companies that will be killed by the Internet. When you look at companies in industries like media, music and publishing that have been destroyed over the last 10 to 15 years, it’s easy to see how this will continue to spread into other, so far, untouched industries.
Music for example, was one of the first industries to suffer at the hands of the Internet. Napster and the new wave of Peer-to-Peer technologies that allowed files to be shared fundamentally changed how music was distributed. The big record labels are still struggling to come to terms with the fact that their distribution monopolies have been destroyed.
However, companies like Spotify and Apple’s iTunes were able to transform that old business model into something that would work online. Spotify and iTunes were able to rethink how the music market should work and were able to leverage the unique attributes of the distribution power of the Internet to evolve the industry. Spotify and iTunes were only able to do this because they were “Internet first” and they weren’t clinging on to broken monopolies.
Both Spotify and iTunes’ business models aren’t a world away from their offline incumbents business models and they certainly did not invent new technology in order to make this opportunity real. Instead, both companies reconfigured how the market operated. In the case of iTunes, each song was able to be bought separately instead of the customer being forced to buy the whole album. In the case of Spotify, suddenly a user had access to the world’s music, all of which could be instantly streamed.
And of course both companies benefited from the Long Tail of Internet storage and distribution in order to massively increase the available inventory.
When you start looking at untouched industries and how they would be better served online, look at the core of the business model and see what can be replaced or reconfigured in order to take advantage of the Internet. Online marketing, distribution, technology, conversion, optimisation and customer acquisition are all opportunities that are presented by the Internet that offline companies will continue to struggle with.
Technology
When people think of disruption, their immediate thoughts turn to sexy new technology, innovative inventions or major breakthroughs in what is currently possible.
In reality, disruption is very rarely dependant on new technology, but instead, how existing technologies are reconfigured.
Instead of reinventing the wheel, you should look to existing off-the-shelf technologies that enable big shifts in focus or cost reduction.
A good example of using off-the-shelf technology to disrupt incumbent industries is what has happened over the last couple of years in journalism.
Over the past 10 years or so, there has been a big shift in breaking news appearing online first. With the real time nature of the Internet, breaking news on television or in newspapers just does not happen anymore. Much like the music industry, the publishing industry has been fighting to save the distribution monopolies that they have enjoyed for the last 100 years. But the power of the distribution of the internet has been unbeatable and so, the whole publishing industry is moving online.
And what technology is the majority of these new online publishing companies built on? WorldPress, an open source platform for blogging and content management. Whilst much is made about how WordPress can give any individual blogger a platform to publish to the world, the bigger shift is how easy it enables new companies to become legitimate publishing businesses.
Like Spotify and iTunes, there are many great examples of “Internet first” publishing companies that are using the marketing and distribution of the Internet to grow incredibly fast. Companies like PandoDaily or BuzzFeed are re-imagining what publishing should look like without the baggage of a broken offline business model.
When you are looking at what technology is needed to disrupt an industry and take it online, don’t get carried away with the technical requirements of what you are trying to do. At some point in the future when you are rolling in money you can think about investing in amazing new technology. Until you reach that point, look at what off-the-shelf technology you can use to build your company.
Disruption is about rethinking about how something works. It is very rarely about the technology.
The Market
All companies have fat and inefficiency. As an outsider looking in, its usually pretty easy to see what processors should be changed, how things should be automated and what needs to be cut. Offline businesses are usually particularly bad at this because there are so many quick wins of the Internet that they have usually not taking advantage of.
As companies grow, they inherently need to chase bigger and bigger opportunities. When a company is a startup looking for a repeatable business model, any small win is significant. But as the company begins to scale, the business becomes hungry for bigger and bigger opportunities that are going to push the needle.
In order to achieve this, most companies will start to look for opportunities with higher margins and start to neglect opportunities with lower margins. A lot of companies also start to offer adjacent services such as customisation, installation, and enterprise customer support in order to justify charging more money.
This creates a gap between the lower end of the market and the higher end of the market. As a potential customer at the lower end, that product or those services provided by the company are either too expensive, not right for you, or simply not available to you. This creates an opportunity for a new entrant to focus on the lower end of the market to better serve those customers.
In order to disrupt the cost structure of the industry, the lower end entrant will need to focus on what they are trying to achieve and significantly reduce the scope of the product or the services. For example, the new entrant might reduce levels of customer support and only offer one standard product. This enables the new startup to enter the market and serve the lower end profitably because it is using an entirely different cost structure.
Now that the lower end of the market can be served with a completely different cost structure, the new entrant can capture the entire lower end of the market and start moving up. The incumbent company can’t compete against the new entrant because the new entrant is able to serve the market at a much lower cost than the incumbent. Eventually the incumbent company is forced higher and higher until they are forced out of the market altogether.
When you are looking at entering an existing market, what features or services can you cut that will significantly reduce your costs and enable you to better serve the lower end of the market? How can you significantly change your cost structure to give you a huge advantage over the existing incumbents?
Conclusion
It is clear that their are millions of opportunities to create new online companies in the company years. Whilst there is a lot of attention on the next outlier success like Facebook or Instagram, the move from offline to online is often massively overlooked.
The Internet rips out the old architecture of so many of the old facets of doing business in an offline world that many existing companies will not be around in just a couple of years time. This presents an opportunity for you to recreate those business models online to take advantage of the Internet.
If you can create a product or a service that meets the demands of an industry, you will have an advantage over your competition that will grow with each subsequent year. The Internet allows you to build cheaper, scalable and more efficient companies that have direct distribution to the entire world.
You will win because the Internet is the future. Today is the start of the revolution.
