Technology Of The Week – The Succes And Risks Of The Innovative Business Models Of Netflix And Blendle

1

October

2016

5/5 (2)

We all know the old fashioned way of watching movies. You had to rent a movie, insert the movie in your video player, skip the annoying parts and enjoy the movie. It was annoying, time consuming and a lot of trouble to just watch a movie.

Nowadays an internet connection, a compatible device and a few clicks are enough to sit back and enjoy your media. Netflix and Blendle made these kind information goods available by ease of replication and distribution. Netflix is a digital movie service where people get a monthly subscription to stream movies and series without commercials. Blendle is a digital news platform that gathers articles from all kinds of newspapers and magazines. You only pay for the articles you read. Articles can be shared, people can react on the articles and comment on these reactions. It is a combination of an online kiosk and a social network.

These business models show us the perfect form of information goods. (1) The information provided by the two organizations are costly to produce but cheap to reproduce. (2) Once the first copy of a good had been produced, most costs are sunk and cannot be recovered. (3) Multiple copies can be produced at constant per-unit costs. (4) There are no natural capacity limits for additional copies. Articles and movies can be sold over and over again. Besides these points the business models version in their pricing. However, in a different way. Netflix offers three subscriptions and therefore gain from extremeness aversion. Humans tend to choose the average option, this Goldilock pricing will increase revenue. Blendle on the other hand prices their articles based on the supplier and the length of the article.

Both business models have a couple of similar strengths:

  1. The services can be easily used on all necessary devices,
  2. They provide much content,
  3. They have low costs compared to the old fashioned way,
  4. They can establish pricing arrangements that capture as much of that value as possible. Done by (a) the registration of the customers, (b) observing queries and clickstreams and (c) through behavioural targeting

Besides these matching strengths, Netflix and Blendle have individual strengths and weaknesses as well:

Table 1

The future shows some interesting opportunities and threats for Netflix and Blendle and for de information goods market as a whole:

Table 2

Overall we can see that Netflix and Blendle are operating in a very interesting market. Offering great opportunities. Both Blendle and Netflix can gain a profit of this fast growing industry.

Group 42 – https://www.youtube.com/watch?v=W_a-XZJ7tnM

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The End of Warehouses

17

September

2016

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In the original supply chains products move from supplier to customer meeting a manufacturer, distributor/warehouse and a retailer on the way. Products are produced in places where it can cheaply be produced and are then shipped to a big warehouse. From there it is moved to retailers, which sell it to customers.

Everybody is familiar with this supply chain. Especially when it is about clothing. But, some changes are on their way. The increased IT possibilities are making this a vulnerable market. To become a vulnerable market, the market must become easy to enter due to technological changes (Granados et al. 2008). Where the classic clothing industry was built upon brands which sold their products through retailers (like ‘De Bijenkorf’ or ‘El Corte Inglés’) there are now retailers selling clothes without owning a single B2C retail shop (like ‘Zalando’). This market is attractive to attack, there is a lot of profit to make. And difficult to defend, online shopping is easy and quick. And thus a vulnerable market.

Because of the shift from offline retailers to online retailers already one step in the supply chain is doomed to disappear. However, that is not where it stops. A new IT improvement can change this market again. At this moment the online retailers are struggling to give customers the right product. Lots of products are returned because it cannot be fitted as customers can in the offline shops.

Start-ups are creating solutions to solve this problem. Apps are being developed where customers can identify their exact sizes so this app can give you an advice about which size you should order. Regardless the sizing method. They even make it possible to order tailor made suits without being in a shop.

In my opinion this new development will change the market again. Another step in the supply chain becomes obsolete, the warehouses. Why store a thousand black ‘M’ size shirts in a warehouse when those shirts can be tailor made and send to the customer directly. This development even creates the opportunity for brands to sell their clothes directly to customers and skip the online retailers like Zalando.

What do you think? Is this development the end of warehousing? And can this already mean the end of newly fast-growing online retailers? Is this a vulnerable market again?

 

(1) Granados, N.F., Kauffman, R.J. & King, B., 2008. How Has Electronic Travel Distribution Been Transformed? A Test of the Theory of Newly Vulnerable Markets. Journal of Management Information Systems, 25(2), pp.73–96.

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Differentiation as the basis of competition

9

September

2016

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In his article about strategy and the internet Michael Porter (Strategy and the Internet, 2001) points out that because of the internet technology companies tend to shift the basis of competition away from quality, features, and service and toward price. I think he makes a very good point, but let’s take a different view on this.

Therefore, let’s take a look on Adam Smith’s perfect market. In order to have perfect competition some conditions must be fulfilled. The most important conditions are:

  1. Lots of buyers
  2. Lots of sellers
  3. Homogeneous products
  4. No entry barriers
  5. Perfect knowledge and information

The effect of these conditions are that firms have no possibility to stand out and ask a different price than their neighbour. If you sell the same t-shirt as your neighbour and he sells it for less money, nobody will buy your shirts. Due to the perfect information everybody knows that your neighbour sells it for less. So far economics 101.

Over the past few decades businesses were able to sell products for a price which they could set themselves. The local clothing shop might have been selling the same products as the clothing shop a few miles further for a higher price. But it never minded, nobody knew this difference.

Internet has changed the situation completely. Because of the internet the barriers disappeared. Your local retailer can sell his clothes online, just as the retailer from a few miles further. The potential group of buyers immediately increases from the local town to everybody with access to the internet. Besides, lots of retailers which were unattainable become attainable and sell the same products as you were used to buy from the local shop. We can see that the internet shifted the market more to the perfect competition. Because of the internet there are more buyers and sellers on the market, the entry barriers are lower (see also the Porter article) and we know exactly what we can buy where and for what price.

Coming back on where I started. Porter sees that there is a fierce price competition going on because of the internet and that we shifted away from competition based on the differentiation of products and service. But the internet does not change anything about the homogeneous condition of perfect competition. The only way to stand out is to deliver a differentiated product or service. Otherwise the price will indeed be the basis of competition.

Isn’t the internet exactly the reason to shift the basis of competition towards quality, features and service?

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