Anatomy of a Business Model

Courtesy: GigaOM

The problem is that you have to think about it. No matter how great your product or your technology is, unless someone is willing to pay for it (directly or indirectly), there aren’t going to be that many users. In fact, the business model innovation is what turns great products into fearsome companies.

Xerox is a good example. It started life as The Haloid Company, a photo paper maker that was on the rocks when it managed to find its way to photocopier-related technologies and patents. They made a photocopier machine and according to their estimates, they had to sell it for about $4,000 a pop — not an easy task in the 1950s.

So what did they do? Instead of selling the machine, the Haloid people figured it would be easier to give away the machine and charge people for what the machine churned out — photocopies. At five cents per copy, no one was going to object to getting that machine installed in an office. Sure the technology was great, but in the end the business model innovation made it a success.

Xerox reminds me of ARM Holdings, which is a chip company. I have been a big fan of the company for nearly a decade. It was pretty obvious that what they had in their arsenal was pretty amazing: the technology to develop powerful, yet low-power chips.

Around 2005 to 2006, it was clear that as the world was going to have more connected devices, it would need more low-power chips for what experts then called distributed computing. Like Intel, ARM could have made chips and basically found itself in manufacturing hell.

Instead, it chose to license its technology to any and all comers. Today, companies from Samsung to Qualcomm use ARM’s core technology and pay it royalty fees. Thanks to that business model innovation, the company is now looking at a future where its long-term nemesis, Intel Corp., might end up getting relegated to the sidelines of the mobile revolution. ARM, incidentally, is one of the hottest stocks on NASDAQ.

The App-y Apple

Just like Apple.

Most of us believe that iPhone is the rocket ship that is making the company billions. But in reality, it is the app store — a business model innovation — that is giving the company its edge. It can get a cut off the digital goods revenues (publishers be damned). It brings in the apps and it brings in the app developers. That in turn helps make the flywheel turn and push the sales of iPhones, iPods and iPads.

The same goes for Google. Search existed before Google, but it turned it into an awesome product, which was then married to an innovative business model — contextual advertising — and in the process became a $200 billion-in-market-cap giant.

Spotify is another good example of a business model innovation posing as a product. No doubt it is an amazing product. However it is the affordable monthly subscription model that makes Spotify a company worth its billion-dollar valuation. The company hit a million paying subscribers earlier this month.

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