I recently spoke during the Mindtrek 2012 seminar about digitalization and new business models. I coined a new paradigm, which I entitled the ”old new paradigm”. When companies face a change or disruption in their current business market that threatens their business model, they tend to be incapable of reacting, even if they know things are changing. Why is this so? The old new paradigm says that this is because the new business opportunity is perceived to be too small, too difficult to access or risks cannibalization of the current customer base. One typical excuse that is regularly voiced when changes in the market are observed is:”we will do it when the market is larger”. Unfortunately, by that point it is too late.
One example of this phenomenon in practice can be seen within the music business and the impacts of failing to react to market disruption was well chronicled in an article called ”The decline of Record Business”, which was published in the Rolling Stone Magazine. When Napster was first introduced to the market, record companies reacted in the classic way. They saw online file sharing as a threat to their current business models and ignored any opportunities that this offering could present. They could hace licensed the application and bootstrapped a new business model that appealed to 30-40 million customers. Instead, they decided to force Napster to shut down and leave the market and therefore eradicated the opportunities that a legal file sharing service could present. This forced customers who wanted to benefit from the convenience offered by this type of service to do so via illegal routes. Many arguments were forwarded from all parties as to why digital music was a bad idea. Retailers said:”don´t sell anything online cheaper that in a store;” Artists told record companies; ”Don´t screw my Walmart sales”. So record companies continued with their old busines model and the ultimate decline of the recod industry commenced.
A similar trend can now be seen in the media business. Prior to 2005 US advertising revenue was growing at a steady rate; however, it then practically halved in the years following this date and has remained in steady decline since. At the same time, new players such as Google have captured digital revenue growth. Media companies are responding to the change by cutting costs, an action that only serves to accelerate the decline. So, ultimately, there will be more layoffs. It seems again that the old business is not capable of renewing and reinventing itself, but instead is continuing with the old business model, despite the fact that the market has changed forever.
It´s interesting to note that recently Elisa Kirja (Elisa Book) was reported to be the largest digital bookstore in Finland. One would have expected that there are more natural candidates available to take that position than a telecon operator. However, in this case the old business once again missed the opportunity to leverage their current customer base and give the market what they were looking for, since digital books prsented a threat to their current business model. However, Elisa did seize the opporunity and decited to use their customer base to build something new. The company is now pioneering a similar approach with mobile payments.
The old new paradigm applies also to hardware-driven businesses, such as those that manufacture devises. Tablets present a much bigger disruption to the computer industry than many people think and are predicted to destroy many traditional device categories. Those who lived in 1980s remember Tascam 4, a track recorder that changed the way bands recorded demos. In 1984 it cost 350 USD; now you can get the same device as an iPad app just 3.99 USD.
What other dedicated devices will be replaced by tablets and their accompanying applications? I believe there are many, such as point of sale devices and music synthesizers to name just two. This represents a threat to the current manufacturers, who will ultimately lose out because, at this moment in time, they just don’t want to hear that the device that they currently sell for hundreds of dollars can be replaced by an application that will be sold on the market for just a few dollars. As such, they opt to continue to sell their expensive devices for as long as they can, and ultimately hand their valuable customers over to the players who do follow market trends and demands.
There is also a second version of the old new paradigm that applies to R&D. It says that it´s always easier and more natural for an R&D driven team to develop new versions of their product than to try to sell the current product. So, instead of selling Version 1.0 of a product to real customers, they would rather focus their efforts on developing Version 2.0 and thus postponing the moment of truth.
The lesson from all of this is that fighting the old new paradigm requires the following;
- Courage to face the new market reality
- Willingness to cannibalize your own business
- Motivation, and ability, to experiment with offerings
- A strong focus on commercialization
There are many ways in which these elements can be achieved … more on that later. So don´t do one more strategy study aimed at establishing the size and existence of the market; don´t do one more customer survey that is aimed at figuring out if your current customers want disruption, since they don´t; don´t wait until you think you are ready – start today. And prove the old new paradigm wrong.