Business is the voluntary exchange among free adults of goods and services. We’ve typically made a distinction between goods and services having a physical form or impact and those for which the good or service is not material, or can not be touched. It is the difference between a truck, a chair, or a razor on one hand, and insurance, trademarks, stocks (and lists of stock prices) on the other.
With the coming of the Information Age, more goods have been released from their physical form and exist only as information: music has lost the LP, books the paper, games the physical board. Human behavior has also been productized in the Information Age – no longer do we need to fill out the form and mail it in for more information, show up at Ladies Night to meet the opposite gender, or pick up the phone and “call now” because operators are standing by. In what could only be a dream-come-true for the behavioral economists of our era, the information-seeking, intention-displaying, inference-driving, interaction-enabling of human behavior have exploded in scale since losing the requirements of physical actions by users (other than, it should be noted, the movement of keys on a keyboard or the mouse on a mouse pad, we have not entered into a world of pure telepathy… yet.)
Students of business want to analyze the behaviors of present businesses and study the history of past ones in order to understand the “why” of the development of businesses.
When students of business talk about McDonald’s being a real estate business, enabled by the automobile, that happens to sell food at their physical locations, we are talking about root causes and the underlying nature of the business, rather than what they appear to be on the surface: in this case, a fast way to get burgers and fries.
To understand what business the various successful business models of the Internet are truly in, we need to better understand their nature and the nature of transformation in our time.
The development of new technologies leads to the development of new businesses. The rise of the railroad, the telegraph, the steel mills, brought about, and were brought into being by, the Industrial Revolution. That revolution overturned the conception of what goods we could produce and at what scale. It also separated the production of goods into several component hierarchies – raw materials, energy, distribution, capital goods, consumer durables, consumer packaged goods – that were novel at the time of their creation and changed considerably the understanding of the farmer receiving his Sears Roebuck catalog out in the plains of Nebraska of what was meant by “goods”. It was no longer possible to think of them all as being the same kind of thing.
On a similar model, the Information Age reinvents the intangible.
But rather than a revolution, I think this transformation is a reflection. We have reconstructed and re-imagined our societies in bits — sometimes quite literally, as in Second Life – even as Facebook maps our relationships with friends & family, 1 in 6 marriages now start online, my Kindle books don’t “exist”, and there is a thriving market for swords, potions and gold that exists only in the cyberspace World of Warcraft.
We are reflecting our world through the means of digital bits, and we are also able to reflect upon ourselves: who we are, what we are doing, what we like, which things give us pleasure or who we want to create communities with. The discoveries enabled by Netflix, Amazon, Pandora or Hunch teach us more about who we are.
We’ve been happy to refer to these as online, or internet, or web-enabled businesses, but the time has arrived to understand and define them better, because they have different characteristics.
Are dating sites, Netflix, a program that teaches chess, Google, prediction markets, Kindle books, Kiva, iTunes, GoDaddy, virtual currencies, job sites, and Pandora all in the same intangibles goods business? If not, what are they?
Is a dating site a matchmaking service? A content site? A seller of intangible goods? A subscription business? Those in the online dating industry can tell you: yes and no.
And as a practitioner in an online information business, I can tell you that this lumping of all online businesses into one undifferentiated framework leads to a worse, rather than a better understanding of our businesses. Even thought we acknowledge the topical differences between dating and movies and books and music and jobs, this lack of a conceptual framework confuses the analogies we can use to understand our businesses, undermines the selection of the right metrics to drive the business, and turns management in the Information Age into a series of happy accidents rather than deliberate planning.
In my post on the IIII hierarchy, I broke out an Information Age business framework:
- Trials & diversions
Each of these layers represents a human need in making economic decisions:
- We need to be able to consume the information in human-understandable form.
- We take information in with our senses – we read, watch, listen.
- We make decisions based on that information to the best of our rational ability.
- By our actions, we also enable experts in that area, whether human or machine, to be able to suggest other information that will be of interest to us.
- From the above comprehension, decisions, and implications, we have desires to interact with people or products.
- We make decisions to do so at a particular time or place, whether online or offline, with others or alone.
- From which comes the ability of businesses to entice or induce us to try out new things.
Over the course of the next several posts, I’ll assert that online businesses are not just one undifferentiated mass, but rather that they should be categorized according to the nature of the economic behavior they are enabling or supporting.
It is worth noting that in the 20th century, the newspaper was able to stretch across all of these layers – from providing the physical platform that gave the industry its name, to advertisements, to announcements, to coupons, and so on: the newspapers were the information appliance tool of that century.
As new technologies grow strong, we’ll see businesses shrinking back from trying to own more than one of these layers. That is not to say we won’t see legacy businesses that stretch across two or more of these layers (the Wall Street Journal as an excellent example) but these vestigial exceptions will grow increasingly rare and idiosyncratic, like Japanese holdouts from World War II or the Medieval German spoken in Southern Pennsylvania.
In discussing each layer in the Information Age hierarchy, I’ll discuss what they must, can, could and mustn’t, do. See you tomorrow!