Traditional Business Models Under Threat

"...New business models are rapidly emerging from the revolutionary Internet, machine learning, and bioscience technologies that threaten the status quo in every field. New rules are being written for conducting business in dealing with social and environmental challenges..."

Charles Conn et al 2018

An example is the tech giants who are challenging traditional business model. The giant tech firms are different to the traditional firms; they do not pay dividends and reinvest revenue into their business.

"...they reinvest their ever-growing cash flow into cheaper and better products to gain market share..."
John Mullen as quoted by James Thomson, 2017

For example, Telstra, an Australian ITC company
"...If Telstra didn't pay dividends for 10 years we would have a $50 billion war chest to take on new competitors..."
John Mullen as quoted by James Thomson, 2017
Telstra

"...is a utility with roots dating back to 1901 and enjoyed, until relatively recently, a regulated monopoly. It makes the bulk of its earnings from legacy networks and has delivered a share price growth of 5.4 percent in the past five years..."
John Mullen as quoted by James Thomson, 2017

Compare this with one of Telstra's competitors, Amazon
"...Is a 23-year-old tech company that has disrupted global industries with......new products and pushing into new markets has seen its share price leap by 487% in five years..."
John Mullen as quoted by James Thomson, 2017

Thus traditional firms face a significant challenge of cashed-up tech giants that have a different view of capital allocation.

Also, most of the founders of the tech giants are major shareholders of their own companies, eg Jeff Bezos owns 17% of Amazon. This is very different from the board and senior management of firms like Telstra, who hold insignificant numbers of shares in the companies they operate.

At the same time, Telstra has had its own growth mis-steps, eg

- investment in Asian telco Reach  with PCCW
- dot.com investment in Solution 6 and Key Corp.
- involvement in Sensis and Trading Post
- investment in Foxtel

An example of a preferred business model in the Internet sphere is subscription/membership approaches. It is one of the most powerful ways of keeping customers, especially when linked with quality service ie they develop a loyalty and trust in the product and/or service plus customer engagement. Some of the big tech companies, who initially offered free services, are using this model. Some examples include

- Netflix

"...it benefits from three things: great content, low price of subscription per month and apathy of consumers having a credit card charged each month..."

Tony Boy 2018a

- Apple (subscription services comprise around 20% of Apple's revenue in 2018)

- Amazon (its Amazon Prime offers free delivery within short time-frames)

Newspapers are using also subscription revenue to replace the revenue lost by newspapers from the decline in advertising that occurred when online platforms like Google started.

Subscription frameworks use a measure with lifetime value, ie estimating total subscription revenue generated by a new subscriber and dividing by the cost of the acquisition of the customer.

Some traditional business models under threat include

Piracy is a threat to traditional business models. The music industry became vulnerable to piracy around 2011, which then impacted film, TV, sporting codes, book publishers, etc.

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. In summary, the automobile industry's future is uncertain in which automated driving and the sharing economy has threatened to displace the traditional approach to vehicle ownership)

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

There is intense competition between the online streaming disrupters like Apple TV, Amazon prime video, Google's YouTube TV, KBO GO, Dish's Sling TV, AT&T's direct TV, Hulu, Disney+, etc.

There is a swing from free-to-air TV and cable television subscriptions to cheaper online services, especially by younger viewers.

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, 2014/15

Retail pharmacists in Australia

Traditionally, retail pharmacies in Australia have been protected from competition by

- location rule (a competitor cannot open up within  a 1.5 km radius of an existing outlet)

- restricted ownership (pharmacist must be owned by a pharmacist and by capping the number of pharmacies a pharmacist can own. This number varies in different parts of Australia, eg Western Australia and Tasmania, 4; in Queensland, New South Wales and Victoria, 5; in South Australia, 6)

- government financial support (in 2015, the government provided around $A 19 b. to community pharmacies for disbursing Pharmaceutical Benefits Scheme medicines and other services)

Additionally, the independent pharmacists have a very powerful political lobby group called the Pharmacy Guild which is battling the government against any deregulation of the industry.

In fighting deregulation, the traditional pharmacies claim that they provide a great role as community health care providers and are fundamental to primary health care

"...the heart of our world-class health system and the government supports a viable community pharmacy sector which will continue to meet the needs of consumers into the future..."

Spokesperson for Federal Health Minister Greg Hunt as quoted by Carrie LaFrenz et al 2018

The Pharmacy Guild claims that the small independents are unable to resist encroaching corporatisation of the industry. This includes

- large private hospital operators, like Ramsay Health Care,

- corporate discounters, like  Chemist Warehouse, TerryWhite Chemmart, Priceline Pharmacy, Amcal Pharmacy, etc.

For example, Chemist Warehouse (started in 1995) and is a volume driven, low-margin, one-stop health and beauty business.

"...Its shelves are stacked high with cheap perfumes, vitamins and make-up, with the dispensary sets at the back of the shop.......also has online business as well......ePharmacy......they have built a powerful network of 400 pharmacies through direct ownership and franchisee partnerships......its market share of 7% of the national pharmacy network of more than 5700 pharmacies has grown into a 25% share  of the overall market by revenue...... is Australia's 13th largest retailer by turnover with then (2015) sales of $ 2.5 billion and more than 10,000 staff, and those sales make up 20% of the total retail pharmacy sales, including 15% of all medicines disbursed under the Pharmaceutical Benefits Scheme......Chemist Warehouse makes a third of its revenue from prescriptions and two thirds from retail sales. The rest of the industry is the reverse..."

Carrie LaFrenz et al 2018

In an effort to address the competitive pressures, some pharmacists have moved to the high-volume discount model while others have become more service orientated for their patients. The Guild has identified some growth pathways for its members, like iron testing, blood pressure evaluation, diabetes monitoring, vaccination, etc

NB Doctors have reservations about this broadening role of the pharmacist into what has traditionally been doctors' work

Other concerns include the possibility of the likes of Amazon starting in the online pharmacy industry!

Also, monopolistic type protection can include regulations restricting the number of entrants by limiting entitlement to government financial backing, location and ownership, etc

Other industries like the media are under threat, ie

"...the media industry is in its fourth great revolution of the past century. The first came with film in the 1920s, then broadcast TV in the 1950s, then cable TV in the 1980s, and now the digital revolution..."

Chase Carey as quoted by Sarah Ellison 2018

. 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 contrast 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

Technology, like mobile phones with apps and connection to the Internet, robo-advice, artificial intelligence, etc is changing the very nature of banking by allowing instant access to information.

Thus, it is enabling a more productive interaction between bankers and their clients. On the other hand, it currently lacks the human element, especially on ethical or moral issues (Kathy Vincent 2019).

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 development to 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)