Traditional Business Models Under Threat

Some traditional business models under threat include

Car (almost all of the big firms were saved financially by US Government after 2008); more recently, the scandal around diesel-fuelled cars, development of driverless and electric cars, collusion between traditional car manufacturers, etc is changing the face of the automobile industry)

Music (decades ago, big studios were owned by a few key record labels, large retail chains & disc jockeys dominated; now the Internet has allowed musicians to dominate & resulted in closure of retail chains, eg
- Tower
closed 89 US outlets in 2006
- Virgin
shut its last USA megastore in 2009
- HMV shut dozens of stores while in receivership in 2013

In 2007 an English pop group produced their songs on a note-book computer & sold 3 m. copies on Internet and made around $US 4m.

The iPod and iTunes changed the way people purchased, listen to and stored music, replacing CDs and MP3 players; similarly, iPhone was a disruptive innovation as it was a true mobile computer, and in addition it

. collapsed the power of a desktop computer into mobile phone with powerful operating systems
. integrated Wi-Fi and mobile Internet access
. allowed software writers to operate on it
. introduced app stores where Apple could centrally manage and distribute all mobile computer programs
. changed the keypad and freed more space for a larger screen
. included sensors like GPS (tell you where you are), magnometer (tells which direction is North), accelerometer (detects iPhone mobility)
. allowed further development of apps

More recently there is a trend to streaming, ie renting rather than buying a song (Spotify, Pandora, Apple's Beat, etc). Spotify has 60 m. active users with 15 m. subscribers to its free service & a library of 20 m. songs (2014). Each subscriber pays $ US 10 per month for unlimited access to the library of songs. It added 2.5 m. customers in last 2 months of 2014. Close to 1 in 5 Australians have tried Spotify. It benefits from the explosion of mobiles. In 2015 it contracted with Sony for its 64 m. users of PlayStation network; Sony has not been successful in getting music directly to customers and lost its leading position in consumer electronics, but content production is still profitable

There has been a shift from downloading to streaming
"...while Apple once enjoyed enormous negotiating power as the dominant force in digital music - an area it helped pioneer more than a decade ago with downloading - it now faces an array of new competitors and finds itself in the position of needing to modernise its offering to catch up to the streaming revolution..."
Ben Sisario et al, 2015

Beats (hip headphones and streaming digital music services provider) purchased by Apple in 2014 for US$ 3 b. will be used to compete with streaming new players like Spotify, Rhapsody, Rdio. Spotify started in Sweden in 2008 and in USA in 2011; has 15 m paying subscribers around the world plus 45 m who listen free. Beats plans to introduce its own subscription streaming service to enhance Apple's iTunes Radio and iPhones music app. Music listeners are shifting from downloads to streaming, ie in the USA, downloads generated sales of US$ 2.6 b (2014) which was down 8.5% from 2013; streaming made US$ 1.8 b and exceeded CD sales for the first time

To re-establish itself in the marketplace, Apple has had to lower its subscription rate to below the market standard, ie from US $10 - 8 per month. Apple is playing catch up while before it was in a position of strength

Streaming makes music more accessible than downloading. It is controversial among artists owing to its low royalty payment system based on artist popularity; payment varies from US$ 0.006 and US$ 0.0084 per stream. But very few musicians have market power to resist it. It is claimed to have reduced piracy in the music industry (Carrie LaFrenz, 2014)

A further development is by Shazam (music app). They uses an algorithm that created a unique acoustic fingerprint for each music track by turning the song into a piece of data. Shazam (started in 2002 before the smart phone) has been downloaded 500 million times and used to identify some 30 million songs. In addition to being a handy tool for identifying unfamiliar songs, it can be used for early detection, ie by studying 20 million searches every day, Shazam can identify which songs are becoming popular and where and releases an interactive map overlay with its search data. This allows users to zoom in on cities around the world and identify which songs are becoming popular in different cities. It is a real-time seismograph of the world most popular music and helps identify new artists, ie

"...searching, streaming, downloading and sharing to answer the question that the music industry has been asking for a century: what do people want to hear next? It's a question that label executives once answered largely by trusting their gut. But data about our preferences has shifted the balance of power, replacing experts' instinct with the wisdom of the crowd. As a result, labels have become much better at understanding what we want to listen to..."

Derek Thompson, 2014/5

. TV broadcasters (national free to air broadcasters & pay channels losing to digital, on-line, on-demand viewing, ie viewing content wherever & whenever you want to)

. Print media (changing from print to digital, on-line, on-demand, etc; eg one media group's digital subscription annual targets were reached in 4 weeks)

. Movies (large studios to independent film-making; digital photography & editing; "big" screen (cinema) to "small" screen (computers/ mobile phones' with media at finger tips, ie YouTube - 6 ( hours watched per month)

. Financial (banking from branches to internet to mobiles; competition to all parts of banking business from the following

- Internet players like Google, Amazon, Facebook, etc competing on payments, deposits & lending; seeking to capture customer transaction data

- Telcos, like NTT Docomo (Japan), moving into the payment space, etc with the proliferation of mobile devices)

Also, digital banking with banking moving from branches to customer digital interaction on internet, smart phones, tablets, etc.; eg CBA has 5 m active online customers & 2.6 m used its Apps in 2014. There claims that 50+% of all banking will be done on mobile phones by 2018 (Philip Baker, 2014a).

In banking

- customers are in control, ie how they spend, manage & move their money around, check their accounts, apply for loans & pay their bills whenever & wherever they are!!!!!

- use of big data, cloud computing, etc to reduce storage & analysis costs

"...To a certain degree a lot of what fintechs are trying to do is redefine things; some will work and some won't but there will be some out there that will redefine what you are trying to do..."

Symon Brewis-Weston (FlexiGroup) as quoted by Tony Boyd 2016

These firms are valued differently to the more traditional businesses. For example, WhatsApp has around 20 staff and is valued at US $ 19 b. These valuations are based on customer numbers, rather than profit. This poses a challenge to the more established businesses, ie how do you grow your customer base and still make a margin and grow profitability? In conrtast to WatApp, a firm like FlexiGroup has 1,300 staff, A$ 100 m. profit and is valued at A$ 750m.

The Murray report on Australia's Financial System (2014) mentioned the impact on the banking industry of the digitalisation of society. Technology-driven innovation is transforming the finance system with the emergence of new business models like crowd financing, mobile banking, cloud computing, new payment services, etc. All these are subjecting the financial system to more market forces including competition which should enhance both productivity and outcomes for consumers. To handle the maze of financial service regulations, the Australian Securities and Investment Commission (2015) has established a special unit to focus on these novel developments. They need to harvest the opportunities that the digital age is creating while mitigating the risks, ie

"...actions which promote entrepreneurship, innovation, adaptation and skill building, that reward 'real' risk-taking, while providing a stable macro economic environment and a well functioning financial system..."

Glenn Stevens (Governor, Reserve Bank of Australia) as quoted by James Eyers, 2015a

Use of smart phones and soaring customer expectations about service means that the banks are competing with global technology giants and fin-tech (financial technology) start-ups. This means that the banks have to improve how they use data, innovate, deliver new products, understand potential new rivals, improve customer service, etc. Thus digital banking is a cultural challenge rather than a technological one, with the latter requiring new hardware only, ie
- do you have a culture that is interested in technology?
- do you hire people who are digitally literate, ie understand cloud, apps, robotics, artificial intelligence, etc?
- do you have enough diversity of thought, ie people involved from different cultural backgrounds, gender, etc?
NB It is better to put more resources into the culture as that will generate more value than IT infrastructure investment

Marketing - the Internet has challenged the traditional focus of marketing strategy, ie from

- target market to potentially world-wide market that is open 24/7

- detailed research and developmentto place the product in market place and see what happens, ie in real time watch, learn, adapt and change as required

- understand your current competition to be prepared for disruption from anywhere, eg hotel industry from Airbnb, taxi industry from Uber and more recently Spotify, automobile industry from software firms like Google, Apple, etc

Tele-medicine (virtual doctors with fully digital health service like in Israel)


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