Wednesday, May 25, 2011

New York Times - Business Model innovation

I found the "Reinventing Your Business Model" reading very engrossing and fascinating. It was interesting to know that two companies (Diamond Multimedia & Best Data) have sold digital music players before Apple and failed. Thus, the key to Apple’s success was the nice blend of good technology and a great business model. This example emphasizes the importance of a very good business model.

One of the companies that went through a business model innovation recently was New York Times (NYTimes). The current chairman Arthur Sulzberger Jr. had already reinvented NYTimes previously in the mid 1990s by spending huge money to add new sections, broaden the newspapers distribution beyond its home city and expand globally by acquiring complete control of International Herald Tribune. NYTimes became one of the first old media companies to leverage the Internet. This helped NYTimes add a new source of revenue and also increase the outreach. In first half of 2004, the NYTimes digital division netted $17.3 million out of the total revenue of $53.1 million and were projected to be growing at 30% to 40% a year.

But in course of time, the revenue from the digital division stagnated. A majority of the readers viewed the paper digitally but the company was earning almost 90% of the revenues from paper edition. Thus, NYTimes had to adapt to the shifting market dynamics. They can’t depend only on the revenue from the paper edition, as the paper edition subscribers aren’t growing, while the digital edition subscribers are growing. Thus they had to innovate their business model to tap into the growing digital edition subscribers. The challenging part was how. Customers used to reading the NYTimes free of cost might be turned off, thus putting NYTimes position as the most visited newspaper website in question.

NYTimes came up with a hybrid approach to this problem. NYTimes estimated 85 % of the online users read less than 20 articles. Thus the cap on the number of free articles was 20. They targeted the other 15% of frequent readers with three different digital packages costing $15, $20 and $30. Though the jury is still out, I believe this a smart strategy. NYTimes had a clear need for a new business model as the current one wasn’t sustainable. They also had the customer value proposition in mind, which in this case is to make sure that quality journalism results in news that reaches maximum number of people. The 20 free articles make sure that occasional readers who are unwilling to pay are not shut out. The profit formula was designed in such a way that it creates value for the NYTimes without compromising on the readership base.

I realize that in this ever-changing business environment business model innovation is more important than ever. I also found it interesting to read that a business model innovation does not always mean creating a new model. It can also lead to tweaks in the current model to make it better. Netflix has been able to do this successfully. They encourage their customers(by charging more for DVDs on mail) to stream videos rather than get DVDs on mail in order reduce operating cost. This reading helped me realize the importance of business model innovation and the circumstances in which it needs to be undertaken.

References

Reinventing Your Business Model - by Mark W.Johnson, Clayton M.Christensen and Henning Kagerman

www.nytimes.com

http://www.businessweek.com/magazine/content/05_03/b3916001_mz001.htm




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