When business models eat themselves

Business-eating-itselfMythologically, the meaning of the snake eating its own tail (Ouroboros) is strangely enough the Infinity Symbol too. Businesses may seem to last forever, but there is also a limited amount of tail to eat.

Let me explain.

Spotify

Spotify had to attract the big brands (artists) to the platform in order to gain traction. Every time the digital platform  signed a big name, the number of listeners climbed. Eventually they even got Taylor Swift. Now there is no reason for anyone not to listen on Spotify.

But as Spotify ‘learns’ your taste in music, and the algorithm produces playlists and stations for you, the constant stream of music obliterates the artist who created it. Unlike radio, where the chatter of the DJs and other human interaction revealed something about albums, artists and other contextual information that constitute the art of music, Spotify turns all music into muzak. I have hundreds of songs in a playlist (that I like) and I don’t know who the artist is.

When all artists stream on Spotify, you don’t need artists anymore, just an infinite number of variations of a genre that suit my ear.

Kickstarter

Kickstarter is a way of raising venture capital. In order to get to where it is, the company needed (traditional venture capital), even while crowdfunding is replacing traditional sources of capital. Eventually, VC can conceivably be replaced altogether by peer-to-peer lending. I can even imagine a time where the applications on these platforms are selected and promoted on the platform based on an algorithmic prediction of likelihood of success. And that the ‘users’ or investors, set an investment budget and allow the algorithm to decide.

Netflix

There are an infinite number of options, but instead of us immersing ourselves in the characters, reading stories about the actors in gossip magazines for the better part of the year, we binge on a series for a weekend – are briefly engaged – and then move on to the next.

I have watched five seasons of Suits and I don’t know who plays the main characters. But I can remember that Corbin Bernsen and Harry Hamlin played major characters in LA Law back in the 80s. Our interest in the actor is fleeting and superficial and they are all eminently interchangeable. Except for the odd break-out series such as Game of Thrones, everything is forgettable.

Netflix needed the big names to attract us, but can’t produce big names that will keep us.

Amazon-search

By never reading something you don’t like, you will forget what you like

Amazon/ Commerce/ Shopping Cart

Shopping sites need to stock the brand we want in order to attract us. Once we are there, like it and return, we set up our favourites to re-order. After that, we are less likely to switch brands, because we ‘set and forget’ and have little exposure to alternatives if everything is done on automatic reorder.

Amazon found its fame by signing up all the big name authors to be distributed online. The Kindl seduced them further.

As soon as every author is on Amazon, then all the readers are on Amazon, and then no individual author matters. You are fed an endless stream of authors/titles that are akin to the one you already like and they all blur into a genre-soup that satisfies you. Ultimately it kills your curiosity AND your taste, because by never reading something you don’t like, you will forget what you like. And no consumer brand eventually will matter when Alexa orders everything.

[ASIDE: That is why social media is so dangerous in fostering groupthink – creating these echo chambers of followers/fans who all happily drink the kool-aid.]

The brand paradox

This means in practical terms that brands are developing a new value architecture: These platform business models are at once very hard to replace because they own the demand. This strength increases over time, because of the self-reinforcing nature of the business model. The more people use Uber, the more drivers will want to drive for Uber.

But at the same time, there is paradoxically very low barriers to entry and the business (platform) can easily be subsumed and surpassed. If a better search engine comes along, the value of Google will fall off a cliff in a matter of mere weeks. The switching cost for the consumer is as low as spending a minute to download an app.

The only barrier to entry is the critical mass of consumer demand. This is hard to win, but easy to lose.

The brand becomes a placeholder: Uber now means taxi, and nothing more.

These modern brands are different from traditional brands in many ways. Most obviously is the way in which there is separation between the product/service experience and that of the brand values. If you have a poor Airbnb experience, you won’t necessarily (not initially and not completely) condemn Airbnb, but instead would understand that it is the host that should be punished with negative brand assessment (ratings). If this happens consistently, you will start questioning the Airbnb vetting process, but there is initially some separation between brand value and the actual product or service. The same applies to say Uber or Amazon et al.

But the flipside of the platform-brands enjoying this immunity is that they are also less valuable as a brand. By that I mean that the huge valuations they enjoy is because of the (crazy) multiples of their anticipated cash flows, and not because of some inherent brand equity. If Uber rebranded tomorrow to Zuber, it would be easily done compared to rebranding Coke.

In summary

Let’s take Netflix as an example, but exactly the same can be said of any of the other platform brands like Uber, Amazon etc.

  • The value of Netflix is in the number of subscribers they have.
  • Because of that critical mass, there is a major barrier to entry.
  • But if you created a product that was demonstrably better, shifting the mass of customers is easy; the barriers to exit are low.
  • Netflix engenders no loyalty from the suppliers (producers, distributors, actors) because in fact Netflix destroys the brand value of the very thing it needed in the first place by virtue of becoming dominant through infinite supply.
  • The customers are not loyal to the brand of Netflix, because there is no real brand of Netflix – it has no brand and no personality, no more than a bookshelf has a personality.
  • If you see a bad movie or have bad reception, you don’t attribute it to Netflix. But neither do you think Netflix is great because you enjoyed Ozark so much.
  • When the brand is a platform, it only has utilitarian value.

For Netflix to grow, it needs to eat the thing that made Netflix great; that is Ouroboros, the snake eating its tail.

All these businesses, now so seemingly invincible, are vulnerable at the core, because neither the customer, the supplier or the partners are loyal, since they are all destroyed in the process of making the company great.

Infinity is an illusion.

Dennis Price: Co-Founder at ganador.com.au and yearone.solutions – can be reached on 0411030436.

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