Katonomics 8: Business Models

Not all models are dummies ...

In this, the second post in the second series of Katonomics, the IPKat weblog's resident (and increasingly popular) Katonomite, Dr Nicola Searle, continues her introduction to economics for intellectual property enthusiasts, scholars, practitioners and policy-makers. Nicola's subject this week is business models: not models who are good at business (in which category once-time INTA keynote speaker, former law student and crafty entrepreneur Elle Macpherson and Spice Girl-turned businesswoman Victoria Beckham instantly spring to mind) but the sort of models that seek to generate profit from intellectual property -- or vice versa.  At this point Nicola takes over:

Business Models 

In the analysis of challenges to intellectual property in the digital realm, business models are often suggested. The idea is that rights-based business models are less relevant in the digital realm and new business models should be developed. For this post, I’m going to take a look at what business models are, how they might be a solution and the debates surrounding them. 

To clarify, business models are not strictly an economics subject. Economics, management [do check these sites out, says Merpel!] and business studies are all social sciences, but the organisational and strategic nature of business models lends itself to management and business studies. Let’s leave it at that, as distinctions between these disciplines are important for purists, but less interesting for everyone else. 

There is an emerging consensus as to what a business model entails. A popular definition is that of Swiss researchers Osterwalder and Pigneur, “A business model describes the rationale of how an organization creates, delivers, and captures value.” I highly recommend their website which offers great content and extensive resources associated with their Business Model Canvas. As their work suggests, business model analysis is flexible. For researchers, business models serve as a unit of analysis or area of innovation. For practitioners, business model analysis is a strategic planning tool. 

A classic example of how traditional business models struggle in the digital realm is the recorded music industry. In the pre-digital era, music was typically sold in bundles (albums) on a variety of formats. Albums are now unbundled and sold as singles. The physical nature of tapes, records and CDs means that unauthorised copying was relatively costly. Copying in the digital era is very cheap. New online marketplaces such as iTunes now exist. There are other factors at work (overview here), but the point is that the digital era has caused major changes in the market for music. 

At the same time, the digital era has created many opportunities. This very blog is an example of what the Internet can do to journalism. Creation and distribution of IPKat content would have been costly and slow in a paper format. The speed, international accessibility and low costs of the Internet make the IPKat business model possible. 

Xerox is a favoured case study for business models and innovation (as in McGrath (2010) and Chesbrough (2009)). Xerox initially began selling their innovative machines, however the high cost of the machine was off-putting and uptake was limited. Instead, Xerox changed its business model to a leasing model, where the entry cost was low, and the photocopiers were a great success. 

The Xerox case highlights the potential of business models. Xerox adapted its business model to work strategically within market conditions. It is ironic that Xerox is such a popular case study for business model innovation because, for print-related industries, photocopying posed a huge threat. Photocopying itself is now endangered due to advances in digital technology and the push for the paperless office. 

Indeed, the copyright industries, or, as they are more commonly known as, the creative industries, have faced many threats in the form of innovations in format, production and copying. Photography, cassette tapes, television, power looms and other innovations have all at one point posed a threat to an established creative industry. This is in line with Austrian economist Schumpeter’s theory of innovation as “creative destruction.” That is, innovation occurs through the creation (innovation) of the new, which causes the destruction (or obsolescence) of the old. Rotterdam-based economist Handke that the recording industry is in a process of creative destruction. While this process of innovation should lead to higher overall utility in the long-run, in the short-run it can prove painful for employees who find themselves de-skilled.

Some interesting examples of business models innovation are in the computer games industry. Like music, computer games face declining bricks-and-mortar retail sales. However, mobile gaming and social gaming (on platforms like Facebook) are taking off. These platforms restrict the ability to copy games, limit benefits for copies, take advantage of network effects and incorporate new types of revenue streams. The buzzword these days is “freemium” where basic service is free but premium service is paid for. 

Computer games appear to be following the software as service transition from products to services. The movement from product to service relies less on copyright and more on End-User-License-Agreements to dictate the control of rights. This touches on the relationship between copyright and contract law as examined in Kretschmer, Derclaye, Favale and Watts' UK IPO paper. These models are relatively untested, so we may be discussing entirely different business models in the near future (more examples here). 

However, the business model solution should be considered within the context of IP. IP represents a policy intervention in the market – it provides a mechanism to encourage innovation that might otherwise not occur. Fundamentally, IP recognises that, without this intervention, the market may not naturally create these incentives. If enforcement of copyright struggles in the digital realm, then is it copyright or business models that need to change? Is this a role for government or markets? 

The answers to those questions are quite subjective and tend to result in heated debates. And so, I leave you to it in the comments section. Keep it clean!