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A BROWSER MANIFESTO – PART 4

In The Master Switch, Tim Wu discusses the rapid consolidation of all media on the Internet and wonders if the information industry will again fall prey to monopolists, as it did in the past with radio, telephone, TV and film. Like many other industries that provoked antitrust action in the last century, these cases all involved distribution business models in which the winning factors always turn out to be scale, financial leverage and brands. Even today on the Internet we see many successful companies using distribution models, including Amazon and Apple. They are new gatekeepers that operate a new kind of consumer destination that commands access to a product category. Will these principles of distribution models continue to work and will one of these companies become the next Master Switch? In a word, no.

When I founded Electronic Arts, I planned and built a distribution pipeline as one of the key strategies. I’d worked through distribution challenges at Apple and was trying to apply Hollywood principles to software. Both Apple and Hollywood had succeeded by going direct to retailers and building control over the distribution pipeline to the consumer. EA built a pillar of strength in the same way using the same principles.

Here are my Top 10 key principles of distribution business models:

  1. 1. Limited physical space
  2. 2. Travel required to destination
  3. 3. Financial scale
  4. 4. Physical scale
  5. 5. Volume inventory buying/owing power
  6. 6. Brands needed for sell-through conviction
  7. 7. Higher cost to bring products to market
  8. 8. Consumer’s limited time/space at site
  9. 9. Significant infrastructure requirements
  10. 10. Must pay/owe in advance

To make just one example, after EA shipped some inventory the retailer owed us money. If their sell-through was not good, they wanted a markdown, returns or extended terms. We would then use that leverage to get them to buy even more inventory of yet another game. I use this example to show that even in a form of weakness – if our product was not good enough and was not selling through – we merely used it to further our advantage. Before long, EA could afford to buy brand exclusives such as the NFL. The consumer comes in and they want football and they have to pay $60 for it, and you have the shelf space and the only trusted brand. You get the drift.

To properly drive this model, you need financial leverage, scale and brands. Today, Internet companies like Amazon and Apple use these same principles and have adapted them to the Internet. Physical space is not really limited, but we all know that iTunes and Amazon have a front page and a bottomless back end and that it is highly relevant what is on the screen and above the fold; there is still “shelf space”. In effect, all the usual principles still apply. So does this suggest that companies like Apple will become The Master Switch? That is certainly how the music industry has felt in recent years. Is it really true going forward?

The opposite is true. For media, the distribution business model is in fact on its last legs. It will become obsolete due to a new business model based on the principles of Internet Discovery through the browser. YouTube began with two guys in a garage, no brand power and no scale. They faced numerous larger and stronger competitors. How did they win the online video category? How is it that The Financial Times and other newspapers are now able to bypass app stores? And what about J.K. Rowling? She would have gotten nowhere with the first Harry Potter book without turning the value chain over to a book publisher and book retailers, including Amazon. But what is she doing today with eBooks? She runs her own website, Pottermore.com. It’s in the browser. It’s cloud-based. It’s a Discovery model, like FT and YouTube.

In the Discovery Business Model, my entire Top 10 list of distribution principles go up in smoke. All ten are irrelevant. Because of this scale, financial leverage and even brands don’t control results. Hence The Master Switch cannot be controlled by traditional distribution thinkers. Instead, it is controlled by Google Search, which in turn, is kept honest by the public. This is the most radical change in business models in history because humans have used distribution models for thousands of years and they’re finally toast. We’ve used distribution models for so long that we’ve literally evolved with them and they’re in our DNA. That is why few people today really understand the massive disruption that is being caused by Discovery.

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2 comments

  1. December 20, 2011

    Hey Trip -

    Interesting take on the new distribution model. My question is: how would JKR launch her first book with this new model. No one would be ’searching’ her. They do now, as Potter is famous and her site will pop up in any search and of course people will by her eBooks. But starting out still has the same problems it always did, and no matter how great the product, the issue of the cloud is ‘discoverability’.

    The old model of physical goods had an advantage – people would browse shelves. They were also comfortable that a seasoned retail buyer had done due diligence and selected a range of product in every category that was safe and worked and was likely ‘best of breed’. But the consumer browsing the internet has no such safeguards, up to and including the risk that the product they get through the post is fake.

    The same was/is true of games as it is for most categories.

    Now Amazon and iTunes and many other well known virtual malls actually do a similar job to the traditional publishers and stores. My wife loves Amazon because she sees a trusted brand, she finds it very simple to pay (no need to get out the credit card and fill in endless forms on some new site for a one-off product) and she believes that the source is credible. Sounds like a loyal chain store customer? You bet.

    It may be the case that customers search for big ticket items like holidays, cars or TV’s. But everyday stuff like books, games, music, food and clothes will be driven by half a dozen main portals where you have an account, can get everything you want quickly and don’t have to remember a long lost password or indeed spend any time familiarising yourself with the site’s map.

    So new products, authors, game makers, musicians etc. will have to try hard to be featured by the Mega Site if they can’t get distribution on Main Street. And it will be easy to get lost in that damn cloud. Perhaps Harry Potter would be gathering Galactic Dust by now if that’s how JKR had started out.

    Finally, there is also a new model emerging where consumers ’see and touch’ products in a store, but go home and order them from a website. For specific stores (say like The Sharper Image) the store and the site are the same thing – but it’s just easier to browse, order something that’s on display but not in stock, the wrong size etc. My wife (yes, her again) did this the other day when a shirt she wanted wasn’t available in her size. Went home, looked up the site, ordered the right size and boom!

    Best as always,

    Dominic

  2. Trip
    December 20, 2011

    Greetings Dom,

    Some very good stuff, thanks! To your question, my answer is simple. If nobody had ever heard of Harry Potter before and it began as a cloud-based ebook, the word of mouth would have been even better than what happened with the real-life physical book. Harry Potter is great IP and you’re simply not going to be able to keep it a secret and word travels fastest on the Internet. Hence the searches would have begun soon enough. And once you have traffic of any kind for anything you can then accelerate things further with cross-promotion. That would have made it trivial to launch the 2nd Harry Potter book simply by cross-promoting it with those reading the first book, and from that point forward any form of searching for one would surface the other.

    Similarly, if Rowling wants to write an entirely new book, or wants to promote a new book or author that is relevant to the Potter audience, she will now find it increasingly easy to do via cross-promotion on Pottermore.

    Merry Christmas,

    Trip

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