Technology innovations are great, but you still need to make money.
by Idris Mootee
Technology-based companies typically make one common mistake. They get too caught up in technological innovation, particularly developing new technologies, or get too obsessed with the next killer technology and think the world evolves around their latest invention. Even if they find the right applications for their technologies, they often defer the serious effort needed to figure out how they create economic value – or how to make money. They often don’t come up with the answers, but instead sail forward and end up with a business without a business model. I find that funny. A business without a business model should not be called a business in the first place. It is different when a company needs to change their revenue strategy as they move up the value chain or extend their activities in the business ecosystem.
A business without a clear idea of how it makes money is like a zombie, and for a business not to understand their roles and purposes is like a zombie without a heart or a brain. I’m not sure what is the technical name is for that? The walking dead?
Traditional technology innovation often leads to a strong internal focus and a fixation on pursuing engineering development while lacking commercialization, marketability and industry architecture. As a result, many technologically innovative firms fail to bring their products successfully to the market or to create a sustainable business model.
Every company should have an idea how they would like to compete (create value) and make money (capture value) and that guides the strategic planning and implementation of all its innovation and planning activities. Strategic innovation should be about highly selective market entry with the intent of subsequent market domination.
There is too much hype surrounding business model design. The truth is that there are only a handful of options, so there is no need to glorify the effort. Organizations are increasingly inter-connected as they design, source, buy, make, distribute and market their products and there are many configurations you can play with. But that is not about the business model, that is the business design or value chain or value network (I think this is a better phrase). Business models are primarily about how to capture economic value by extending the revenue sources. It is not uncommon for companies to operate outside and across traditional industry boundaries and definitions.
Any strategic innovation effort could lead to reconfiguration of assets and capabilities. When you hear the name Skype, what do you think? Probably free Internet calls. What is Skype’s business model? Well they never have really had one until now. They have a great offering and good user experiences and the customer value proposition is compelling—free.
How do you make money by providing free voice calls? It looks like they have finally figured it out. They now have a “free plus paid services” model. Is there any business model innovation here? I don’t think so. They charge you for calls outside of the Skype user base. They did try a few innovative experiments including sending money via Skype. However, when your corporate parent also owns PayPal, that won’t work. It was shot down very quickly. I don’t think they will try Skype auction next.
Next they should be putting their innovation effort on mobile. There are lots of opportunities for innovation that brings in new and real revenue. So, will they end up becoming a telecommunications company? They need to find a real problem to solve. Go back to the unmet needs. Generate revenue from “upstream” partners. The local cost or free customer proposition limits their abilities to charge more, so they need to go somewhere to find revenue. Serving ads won’t get them where they want to go. The mobile area is still where the money is… at least for now.
I remember the analyst conference last year when Josh Silverman’s presenation was to address the following:
- How does Skype generate revenue?
- What drives Skype’s cost model?
- How will a software company change real time communications in ways that legacy telcos cannot?
- How is Skype structured to address its various market opportunities?
The net message was that they expect to double their revenue to over $1 billion in 2011 from their 400 million registered users, while maintaining segment margins of 18%-20%. Solverman stated that there is a communications paradigm shift going on where hardwired networks and devices are gradually being replaced by software-based networks and flexible devices.
For Silverman, Skype’s opportunity is to become the world’s leading communications software company. To reinforce his point, Skype will not simply be on familiar telephony devices, it will show up in intelligent TV sets, car dashboards and intelligent public access terminals such as bank ATM’s – all tied to a common network. That’s a nice aspiration, but it’s hardly a business strategy with a business model. At the end of the day, can’t they just tell me what they are planning to do in the next three years and where the revenue will come from? This is not the question most people like to address.
Idris Mootee is the CEO of idea couture, a strategic innovation and experience design firm. He is the author of four books, tens of published articles, and a frequent speaker at business conferences and executive retreats.