With more and more industry-level disruptions over the past decade, businesses are looking for new ways to innovate. It may not be enough to simply innovate with new products or services, or new processes. Business model innovation is one, less obvious, direction in which to innovate.
In 1997, Steve Jobs returned to Apple just as it was on the verge of bankruptcy. Until then, Apple’s business model was based on selling “one-off” products without additional revenue streams, such as its traditional Mac hardware and software. Apple made money from selling its own software on the Mac platform, but it did not make any revenue from other companies selling software on its platform. A few years after Jobs’ return, Apple released iPod in 2001, followed by iTunes in 2003. Not only was iTunes revolutionary by legalizing the purchase of electronic music (MP3 files), but Apple also created a recurring revenue stream that would accelerate its business and disrupt the entire music industry at the same time. Apple didn’t stop with digital music; it added applications, books, movies, and TV shows to the iTunes Store. It also leveraged this platform across all its new devices, including the iPhone and iPad. Apple iTunes has been so successful that if it were it’s own company, it would be 130th in the Fortune 500 list based on revenue of $7 billion per quarter (Brownlee, 2014).
Perhaps ironically, just as Apple disrupted the music industry in 2003, another up-and-coming disrupter, Spotify, is targeting a new subscription music market to displace Apple’s stronghold (HBR, 2011). Spotify offers a subscription service for $10 per month that allows users to download an unlimited number of songs available from a library of 12 million tracks. In Spotify’s case, the innovation is not solely in the technology; the mechanism and user interface for downloading music is very similar to Apple’s iTunes. The fundamental innovation and differentiator from Apple is in the business model. Just as Clayton Christensen describes in the Innovators Dilemma, Spotify is using a low-end disruption to take on Apple. Apple may now be dealing with an Innovators Dilemma of its own; Spotify now has 10 million paying subscribers and market share is being taken from Apple (Sisario, 2014). While $7 billion in iTunes quarterly revenue is very impressive, Apple should not get complacent and ignore the rising threat to its business. To combat the threat of Spotify, Apple recently purchased subscription-based Beats Music (Constine, 2014). Apple can position Beats music to take on Spotify head-to-head without cannibalizing its existing iTunes business model or jeopardizing the current revenue stream for the music record labels.
What are some of the factors that make Spotify’s business model successful? Amit and Zott identified 4 key areas for adding value through business model drivers: Novelty, Lock-in, Complimentary, and Efficiency (Amit and Zott, 2012).
The novelty in the Spotify model is that users have access to an unlimited amount of music content. Compared to the Apple iTunes model, users can access as many songs as they wish for $10 per month on Spotify, but they can only purchase around 10 songs on iTunes for the same cost. Spotify’s lock-in strategy is simple – since customers are tied to a monthly subscription, if they want to continue to listen to an abundance of songs, they need to continue making credit card payments. Spotify is complimentary to Apple hardware products, in addition to non-Apple products, such as Samsung Galaxy phones. Enabling the Spotify software to run on any device leads to the fourth value driver, efficiency. Users have access to music anywhere, on any device, at any time. The platform-agnostic nature of Spotify not only creates a seamless transition across various devices, but it is also a competitive advantage over Apple who rarely builds solutions on other platforms. Spotify has a winning business model strategy and if they can achieve economies of scale to become profitable, then they will become a real threat to Apple.
Spotify isn’t the only company to leverage the lock-in strategy – out of the four key drivers that Amit and Zott discuss, the lock-in strategy has become more recognizable in technology over the last few years. One example of this is the Cloud Storage Wars; a virtual war between Google, Dropbox, Box, and Microsoft, and Apple (Mills, 2012). Google recently slashed its storage prices to $10 per month for 1TB of storage, a move that threatens Dropbox head-on. The strategy for these companies is clear: there is no business value in providing cloud storage alone since the technology has already been commoditized. The strategy is to lock-in users to their platform, make the switching costs high, and then upsell other solutions. Google’s storage service, Drive, is also complimentary to its other services, and Google provides an API for 3rd parties to connect to it. With the Drive service, Google hit on all value points described by Amit and Zott.
Adobe is another company that has changed its business model in the last few years. Adobe has shifted its business from a perpetual-licensed revenue model to a subscription-licensed revenue model (Adobe 10-K, 2014). Prior to the subscription model, Adobe would collect a high percentage of its revenue up-front every 12 to 18 months when it released the Creative Suite family of products, which include the flagship products Photoshop, Illustrator, and Acrobat. This led to great windfalls for the company on a periodic basis, but it also led to deep troughs in the business cycle in off-year development cycles. Subscriptions allow Adobe to collect revenue on an on-going predictable basis, normalizing revenue streams over the long term, as opposed to the risky boom and bust revenue cycles associated with the perpetual-licensed model. Subscriptions also allow the product teams to innovate at a faster pace without having to “charge” for new features. Not only do subscription models result in a lower up-front cost for users, but it also allows for on-going value and innovation to be delivered. Like Spotify, Adobe is building a platform called the Creative Cloud that supports the four key drivers of new business models: Novelty, Lock-in, Complimentary, and Efficiency. Adobe has successfully brought in 1.8 million paid subscribers to the Creative Cloud service, adding 400 thousand paid subscribers in the first quarter of 2014 (Brunstein, 2014). Retaining existing subscribers and attracting new subscribers will require constant value to be added to the service, in addition to generating on-going stickiness. Only time will tell how successful this business model innovation has been for Adobe, but so far the switch is looking very promising and has created a services future that will generate more innovation than was possible in the perpetual-license business model.
Adobe, 10K, 2014, Adobe Systems 10K, http://wwwimages.adobe.com/content/dam/Adobe/en/investor-relations/PDFs/Adobe-Systems-Incorporated-FY2013-Form-10-K.pdf
Amit and Zott, 2012, Creating Value Through Business Model Innovation , http://sloanreview.mit.edu/article/creating-value-through-business-model-innovation/
Barnett Nick, 2011, The iTunes Business Model and its Widespread Effects, http://www.thevlyhouse.com/2011/01/the-itunes-business-model-and-its-widespread-effects/
Brustein Joshua, 2014, Adobe’s Controversial Subscription Model Proves Surprisingly Popular, http://www.businessweek.com/articles/2014-03-19/adobes-controversial-subscription-model-proves-surprisingly-popular
Constine Josh, 2014, Apple Wants Beats Music Because Transitioning iTunes To Streaming Could Kill Download Sales,
Gokey Malarie, 2014, Google Drive price cuts signal start of Cloud Storage Wars – What will Dropbox and OneDrive do? , http://www.techtimes.com/articles/4408/20140315/google-drive-price-cuts-signal-start-of-cloud-storage-wars-what-will-dropbox-and-onedrive-do.htm
HBR, 2011, Why Spotify Will Kill iTunes, http://blogs.hbr.org/2011/07/why-spotify-will-kill-itunes/
Sisario Ben, 2014, Spotify Hits 10 Million Subscribers, a Milestone,