From the industrial age to the network age

Marketing grew up in the industrial age. As this age gives way to the new network age, companies will grapple with dramatically new and challenging issues. In this edited version of his Marketing Society Conference presentation, Professor Venkatraman describes four major shifts that companies must now understand: new business models, where the cash register is, the active role of consumers and the speed of technology

WE NOW TAKE it for granted that history really started in 1995. In August 1995 a relatively unknown company called Netscape went public and created a market capitalisation of one billion dollars. That itself was not new but it was the first time that a company got a billion-dollar capitalisation by giving away its product free. Fast-forward to 2007 and consider this number: one trillion dollars. Companies that are capitalised with a trillion dollars are some of the companies that we know well: Microsoft, Google, Nokia, Amazon, Apple, IBM. What has happened in the last 12 years has shifted the focus from a billion-dollar single company to a set of companies that make a trillion dollars in capitalisation and that are ruling the world.

They are creating products that essentially define the network era. It will be the norm for the next generation to regularly play video games, interact and have conversations with people they have never met. This generation will be going into the workforce very soon to create, consume, innovate and do things on the network that we would find it very difficult to even imagine just a few years back.

Commerce is shifting online, conversations are shifting online, communities are being built online and that is creating an entirely new infrastructure in which managers, and companies, products, values and markets, are created. I want to describe four major shifts the network age is producing, and explain why companies, large and small, local and global, need to recognise these shifts.

This is not happening overnight; however the technology is happening overnight. But the business practices are all lagging so we have some time to think about how to accommodate these shifts. But not much.

1. A shift in business models

It is very simple to look back in history and say all the management ideas, including all the marketing ideas that we take for granted today, came from one industry – the automotive industry. At the turn of the last century that was the laboratory we studied and where we created ideas and extracted principles to be practised in different industries. Today would we actually go and study the automotive industry to steal ideas for management? Of course not. We are studying the companies that constitute a trillion dollars in market capitalisation: the network business models.

Let’s say in 1980 you wanted a computer. You could buy it from IBM or Digital or Unisys or ICL or Fujitsu. You couldn’t go to IBM and say, ‘I love your computers but I want to be able to get the applications from Unisys, the operating system from ICL and have it serviced by Digital’. But over the next 20 years that’s exactly what happened. I could buy the monitor from Samsung, I could use the Apple operating system, I could get the POP line from Microsoft and I could have it sent wirelessly using Google. That decomposition occurred in the last 20 years in other industries as well.

Fast-forward to 2002 and we see that’s exactly what happened. We can buy in layers of components and knit them together so we do not have to be vertically integrated. We are now virtually integrated – buying pieces from different companies to assemble ourselves.

Now think about the automotive industry.

We couldn’t really go to an automotive company like GM and say I love your chassis but I want to be able to get the engine from Jaguar, the electronics from Lexus and have it serviced by Mercedes-Benz. You can’t do that now, but we are getting to the stage where the automotive industry will become equally decomposed and loosely integrated.

What is the offer and who owns it?

When that happens many questions arise: what exactly is the notion of a product, what’s the notion of an offering, what’s the notion of an experience? Who is articulating how those industries will evolve and how the experiences will be felt by different consumers? That’s the big challenge.

The computer industry is simply an early example of the shift that we need to think about. Don’t think of any product or service as being vertically integrated; think about the decomposition that’s possible and the recombination that would make the values and the products and the service different in the future.

Business models will be based on portfolios of capabilities assembled through different types of relationship. But these business models keep changing, so we can’t assume that what we knew yesterday is true today or what we assume today is going to be true tomorrow. The computer industry is simply a leading indicator of what’s going to be much more widespread in the network era.

2. A shift in where the cash register is

In the industrial age the idea of the cash register was very simple. Wherever you sell a product, you extract money from the consumer. There’s after-sales service and there’s before-sales activities, but essentially the cash registers were very well defined.

In the network era, the new rules essentially challenge where we place these cash registers. You need to think about this very seriously because it has profound implications for where value is going to be created and what your core competence is going to have to be to extract that particular value.

Let’s first look at the music industry as an example. Just think about how we bought music just a few years back. We got the hardware, turntables, cassette players, Sony Walkman. We bought the content in standard albums: 33 rpm, 35 rpm and 70 rpm. (My 18-year-old college students wonder why we would even categorise music format in terms of rpm.)

Then we bought the music in physical stores and we shared it with our friends, and the music industry didn’t worry about it.

Piracy was not a big problem. The industry was very well established and every one of those layers could extract value; the cash register was very well defined.

The iPod single-handedly changed all that. When I was doing research with Warner Music, the Warner Music manager asked me in what other industry can we find consumers making perfect copies of their product at near zero cost and distributing it on the net to people that they have never met? That’s what happened with the iPod.

Now we are thinking about layers of capability and so we need to introduce two new layers: software and decision rights management. Software because we can digitise music and have it distributed in different ways, and the decision rights management to make sure that we can’t indiscriminately pirate copies and distribute them.

Person-to-person sharing allows individuals to share without necessarily knowing each other and this gave rise to the entire idea of communities such as Facebook and MySpace, and so on. So now in the networked era, music is no longer just on the computer but is using the network operators. You’ve got Apple, wifi and Waterfall and T-Mobile, and everybody else who’s coming into the space.

Wresting control from content owners

The reason why the network operators come into the space is because they want to defend the cash register called dial tones.

Consider this: the global music market for Apple iTunes, Wal-Mart and Amazon all together in 2006 was US$4 billion. The industry for dial tones on your mobile phones is US$5 billion. Kids paying a huge premium to get personalised dial tones is a five-billion-dollar industry and the network operators want to control it.

So now you see Apple wanting to defend the cash register for iTunes. You see the content owners wanting to defend the cash register for their albums and you see the network operators wanting to defend the cash registers for their digital dial tones. All those markets are colliding and are essentially reconfiguring themselves to figure out who has the power to jockey for a particular cash register.

Look at the music industry right now. If we had done the music industry analysis the old-fashioned way we would have put all the music labels at the centre of the industry. But music labels don’t have the control. Who actually gets to decide the price of music when it’s digital? The music labels have lost control to Apple, to Wal-Mart, to Amazon and others.

Suddenly the decision rights will actually influence the fundamental nature of the industry as it shifts from the content owners to the channel, and ultimately from channel to the communities like MySpace and Facebook.

Now why is that critical? I used the computer industry to illustrate the fact that the vertical integration of the industrial era is no longer the model. The model is virtual integration. I use the music industry to get us thinking about the fact that the person who controls the cash register is changing, so in the network era the big challenge is who has the decision rights to control the most important part of the competitiveness, which is pricing.

The first thing we do in marketing is to differentially price. But what happens when someone outside the industry comes in and essentially creates blanket standard pricing? Think about the implications of that in your own industry going forward.

The advertising cash register

Advertising is the second example that redefines where the cash register is being located as we shift from the industrial age towards this information age – from the physical world to the virtual world.

We know Google allows us to search, and we all know that it makes money monetising information by placing ads. But it also gets it more indirectly.

But put yourself in the position of someone like an ordinary newspaper reader – say a Telegraph reader – looking for news. One publisher makes the decisions as to what he will see. Contrast that with Google News, which allows the synthesis of 4500 news sources, highly customised based on what you have searched for on the net. The New York Times says ‘all the news that’s put to print’ (or all the news that’s put to print and blog and stream and everything else). Google basically synthesises all that and gives it to you in a highly personalised form that’s multi-lingual and updated on a continuous basis. Suddenly, it is in the newspaper publishing business.

Going forward it can also make money using Google maps. Maps are like searches: the relevant information when you want it on whatever device you want it in whatever context you want it – free. The software is free and the tools are free, so it makes money indirectly. Newspapers make money directly using advertising that is standardised. Now advertising is highly customised and contextualised as consumers do their shopping online.

YouTube was bought for US$1.6 billion and we all wondered why. But the interesting thing about YouTube is not all these crazy ads that are being uploaded but the power of YouTube as a test marketing platform: test marketing a product’s features and test marketing communications. It’s far more efficient and effective than traditional test marketing. So YouTube might look expensive at US$1.6 billion if you didn’t know how to monetise it. But US$1.6 billion looks like a very inexpensive buy if it is turned into a test marketing platform.

What is Google to you?

Again, back to the technology. Today the maximum video that you can upload is 10 megabytes, but 10 MB files are very poor quality. YouTube is already experimenting with a gigabyte file so I can upload high-definition television clips, which means that these sites become the media. They become the channel and the conversation conduit.

So the real question to a group of marketers is this: what is Google to you? Is it a partner? Is it a competitor? Is it a service provider? Or is it a customer? Do this analysis and then ask yourself what that relationship will be in the future? Every one of the companies I work with recognises that Google’s role is different for them today than it will be in the future. So start thinking about future Google when you ask these questions of your business.

3. A shift in the role of the consumer

The third shift is the shift in the role of the consumer. In the industrial age we treated customers as individuals; they were independent and very passive. Today in the network age they are highly collective, highly interdependent and very active.

We all know Nielsen – the company that tracks market share. But it does it the oldfashioned way, using statistics and point-ofsale data. But it has started a community called Hey!Nielsen, which asks people to come and discuss rather than simply have an abstract number of market share. It wants to understand our gut feelings and our opinions in much more detail.

There’s also something called Current Television. Al Gore is the chairman and Current Television allows you to make usergenerated advertising; this allows advertisers to use consumers to create ads rather than (or in addition to) advertising companies.

ESPN in the US is a very big television channel for watching sports programmes. But the fastest-growing feature of ESPN online is ESPN conversations in which people are watching ESPN on television but chatting online with their friends about what’s going on.

The last thing I want to highlight in this third shift is what’s called social retailing. Walk into a boutique department store in New York and you will see a virtual mirror that is aimed at young women. You walk in, try on your dress or whatever and you connect your buddy list to the mirror, which beams the pictures to your friends. The friends can then tell you whether this particular dress looks good on you or not.

The buzz so far is the recognition that shopping is not done independently but socially. The mirror also allows you to try out all the various combinations of a garment without you having to put them on, because the other side of the mirror allows you to try out different colours and different accessories. It changes shopping and changes marketing.

4. A shift in the speed and pervasiveness of technology

The fourth shift is one that encapsulates many of the other shifts in a very powerful way. All this is possible because of the pervasiveness of technology. Moore’s Law makes computers faster and cheaper; Metcalfe’s Law that says anything that can be connected will get connected. We can connect people, we can connect refrigerators, we can connect our Nike shoes all to the internet, and by connecting to the internet we extract value. The third law is to do with bandwidth that allows us to perform these interactions at a much faster speed.

When you put it all together it impacts your products, it impacts your processes, it impacts your services, and impacts how customers interact with you.

A computer on wheels

Here is one last example. How many lines of core are there in an automobile? Software has lines of core: Windows XP has 40 million lines of core, an Airbus A340 has a billion lines of core and a high-end automobile has a hundred million lines of core.

But we still think about an automobile as an internal combustion engine that runs on gasoline. A car is really a computer on wheels. If we think of a car as a computer on wheels we can provide a variety of valueadded services; keep track of where you are going and give directions about where to go and eat, where to stay, and so on.

Think about what could happen when we log onto your car. The network identifies who is driving as well as who else is in the car and provides a set of value-added services to the driver and the passengers. Once a car is connected to the network there is a whole range of services that we can barely imagine today that are going to become possible in the near future.

Even today remote diagnostics are possible. The display on the car is still very old-fashioned. A red light comes on and says ‘check engine’. With what technology? You can’t just open up the hood and see what’s going on because underneath is a computer.

So now when you get a red light to fix the engine, GM is able to diagnose remotely and tell you what is wrong and how to get it fixed. Often the solution is on software downloads that can fix the problem immediately.

To summarise ...

1. The business model shift says no longer is everything done by you but things are done with partners, which has implications for how you brand and how you deliver customer experience.

2. The second one is the cash register shifts that change how you monetise what value you bring. This can be direct or, in many cases, indirect.

3. The third one is to recognise the role of consumers: not as independent passive players but as a highly interdependent group who are actively shaping what your brand means.

4. Fourth, all this is possible because the information technology infrastructure is changing very fast. We have barely scratched the surface in terms of fully exploiting it and I’ve simply used the automobile as one example to get us thinking about how different these things will be.❦

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Business models keep changing, so we  can’t assume that what we knew yesterday is true today or what we assume today is going to be true tomorrow. The computer industry is simply a leading indicator of what’s going to be much more widespread in the network era.

 

Apple’s iPod and iTunes single-handedly changed the way we buy music in the network era.

 

YouTube might look expensive at US$1.6 billion if you didn’t know how to monetise it. But US$1.6 billion looks like a very inexpensive buy if it is turned into a test marketing platform