Finding Profit in a World of Free

SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review, I’m Sarah Green. I’m talking today with Saul Berman, vice president and global lead partner for Strategy Consulting at IBM Global Business Services. He’s the author of the new book, Not for Free: Revenue Strategies for a New World. Saul, thanks for talking with us.

SAUL BERMAN: Thanks, happy to be with you.

SARAH GREEN: Saul, I love the title of your book. But it is funny to think that it should sound so counterintuitive. How did we get to this place where we’re saying, hey, your product or service, it doesn’t have to be free could actually sound revolutionary?

SAUL BERMAN: Well, it’s kind of interesting given what we’ve been through in the media space in particular that’s now spreading to other industries over the last few years. And really, with low cost communications, unlimited bandwidth, new technologies, and it started in the music space, clearly, first. There’s been an increase in consumer expectation about what they can get and if they can get it for free or near free. Then of course, others have written books. One by Chris Anderson that talked about free and suggesting most content should be free. So it’s somewhat controversial to suggest that content needs to be paid for one way or another, and it’s really not for free.

SARAH GREEN: So I guess the question is, once consumers have started sort of being trained away from paying for things, can companies really coerce them back into paying for anything?

SAUL BERMAN: Well, people will pay for customized experiences and services. And what we’re increasingly seeing, whether it’s in the consumer world or in the business world, if you provide an experience or service that people really want, they’ll pay for it. So we see more recently the advent of the applications on the iPhone and the iTablet. And increasingly, people are paying for content that maybe they could have gotten online for free. We’re finding increasingly, that audience that’s being built or that network, or that group of users, has value to other people in other ways and so they’re willing to sponsor or pay for that in other ways. And we’re also finding there’s different ways to monetize different parts of your content. So whether it be in the traditional music space, whether it be in other kinds of spaces now where information and content is becoming part of the experience, such as driving a car. Or whether it becomes about operating appliances or other more business to business experiences the question is, who pays for what? And quite honestly, where does the value go?

SARAH GREEN: And the way you talk about this in the book is describing it as revenue innovation for the business wonks in the audience. For those of us who might not be business wonks, can you sort of break down this concept a little more and maybe talk about how it in fact, goes beyond the media sphere? Because I know in the book that’s something you really hammer home. This isn’t just about media companies.

SAUL BERMAN: Well first, let’s take the concept of revenue innovation and where that fits. We’ve been talking for a number of years and many of our CEO studies have indicated the importance of business model innovation to the success of companies in any industry in business to consumer or business to business field. And we’ve codified business model innovation into industry model innovation, where you really change the whole industry structure and do things in a different way maybe, such as a Netflix or an Apple have done in the past. To the revenue model innovation, where you just in effect, get paid for it in a different way or charge for it in a different way, or many different ways. And the enterprise model, where the business functionality basically stays the same, but who does the various parts of that functionality changes as you innovate your business model. So we think business model is very important. We think revenue model is a key place where you can experiment with your business model. It’s relatively simple and lower cost. It’s more controllable and it allows for smaller scale, shorter term experimentations. It can provide funding for more extensive, broader business model innovation, provide insight into how the customers and markets are changing on a real time basis, and give the company a few short-term wins from which it can extend.

Now, the second question you’re really asking is about the applicability of this to the broader universe. And what we’re suggesting to you is that a lot of the value-added that comes from what we traditionally would call atoms products, or physical products, as opposed to bits or digital products are increasingly coming from information services that are a part of the experience that goes with that traditional atoms products. So I recently came from the CES show last week, the Consumer Electronics Show. We saw lots and lots of smart homes, smart appliances, smart connected devices. So increasingly, whether it’s your health care, whether it’s your home, whether it’s the car you drive, the information related value in that product or that service is increasing relative to the whole. So in a car, now you can get downloaded entertainment. You can get downloaded navigation. You can get navigation services. You can get immediate response help surfaces. You can get diagnostics about where you’re going, the roads, your car itself. All those are new ways to make money that weren’t traditionally part of that physical atoms product we know as the automobile. So increasingly, whatever business you’re in, you’re going to have more information content in the product or service and experience you offer. And more and more of the value will come out of that. So increasingly, these atoms businesses take on many of the characteristics of the traditional, more additional businesses that started that way by nature.

SARAH GREEN: So we’ve sort of been talking about how this really goes beyond the media. But if I can, I’d like to go back to the media for just a minute and talk a little bit about television. Mostly just because you have this great quote in the book from a TV executive, “Music may have gotten hit by a bus when peer-to-peer sharing blew up the revenue stream, he says, but television is just committing suicide.” Can you walk us through this a little bit and maybe explain what you do if you were a television executive.

SAUL BERMAN: Well, again, let me try to extrapolate from that experience. But I did write a white paper about five years ago called, “The End of Television as We Know It.” And we said back then that content was going to be free from time, space, place, and increasingly, you’re going to be able to access content wherever and whenever you want to use that content. I did say in that paper that your grandchildren might not know what a television set is. A television set becomes tomorrow’s phonograph. They will watch more video content than ever. But video content will be, if you will, on demand, and in any place, on any screen they want it to be.

Now, the challenge again in this industry or any industry is, how do you protect your existing model, where most of your money comes from? And we’re seeing, if you will, moves in that direction with TV everywhere, which will enable you to port your television content to your over the top or digitally connected devices to the Internet and be able to get it wherever and whenever you want to. The other side of that is there will be other models needed that the video industry is experimenting with as well. Things like, Hulu and others that are out there trying to provide a la carte video streams or subscription video streams in the nontraditional platform to accessing that content. So I think, again, it’s about the consumer wants to have the content on their device, the consumer wants to have the content in their office, the consumer wants to have it when they want it.

They want to have it at different pricing models, which is really what the book gets to in revenue models. In some cases, they want a pricing model where they pay for it on a subscription basis. On another where they pay for it a la carte. Another where they pay for it on a variable basis based on the content and when they want it. Similarly, in other cases, they will be taking it with advertising and they will be able to have it sponsored or provided by the advertisers paying the cost and there’s a certain segment of the population that wants to do that. And there are others that want it included in bundles. They want it packaged. Or they want it decomposed and they’re willing to pay a premium for those decompositions.

So, for example, ring tones. Very interesting that a digital album is $9.99. Typically, a digital song $0.99. But a 10 second clip of a 3 minute song called a ring tone went for $2.00, $3.00, or $.4.00. So lots of innovative ways to monetize your content and potentially, get more for it. But you have to look at all three of these groups we’re talking about in terms of how you monetize the pricing model, the payer model, the packaging model, and look at the segmentation across that. Similarly, whatever device it is you’re selling, whatever physical product or service you’re selling, you will similarly have to look at these different groups and how do you monetize appropriately within each of those channels or each of those groups?

SARAH GREEN: One thing I just wanted to mention was of course when people talk about free, we often don’t really mean that it’s actually free. We mean that it’s advertiser supported.

SAUL BERMAN: Well, that’s a version of as we call it, not for free. You may not pay for it and that’s certainly included in here, but somebody’s paying for it. And I think the point is to suggest that people need to realize that somewhere along the line, somebody has to pay for it. And we need to identify who that group is in each of our, if you will, products or services.

SARAH GREEN: I know in this interview we’ve touched on a lot of sort of wide-ranging ideas. But as a business executive, if you just wanted to say, OK, enough, I get it and just wanted to get started, what would you do? What’s your next step?

SAUL BERMAN: Well, that’s an excellent question because we don’t have, as I say, a silver bullet. And you need to get started someplace or you will be blindsided. So we’re saying to our clients that they need to be more innovative in their revenue model and their business model. And to get there, they really need to do a series of things.

First of all, they need to understand the structure of their organization and be able to enable that organization to take on these models. So too often, traditional organizational models are set up to do things the way they were done in the past and constrain the growth of these new models. So for example, if we think content is going to be integrated, services are going to be integrated with the physical innate objects at the same time, we need to think about what the organizational model that’s going to enable us to do this as opposed to have somebody come in and shift the value away from us.

We need to think about the talent. What are the skills that are going to be needed for these types of innovations in the future? Do we have those skills in our organization? And if not, how do we bring them in either through partnerships or bringing new kinds of talent into the organization? And, if you will, new tools to access that talent more broadly in the marketplace for their thinking and their ideas.

The other challenge is around this question of complexity. As we say to our clients, a lot of this is about masking the complexity. You have to manage the complexity, but your client, your customer, needs to have that complexity masked for them. You have to make it simple for them to use your product or your service, give them what they need, and you have to manage that complexity behind the scenes and actually simplify for them.

And fourth, you need to measure the right things. What are your criteria for success? So one of the questions we asked in our recent CEO study is, how much of your product or service revenue is going to come from these new business model innovations, these new revenue model innovations that you’re going to experiment with? And that should be an aggressive target and you should measure that. So you need to determine for your own organization, how do you measure success in the space and make sure you’re tracking it and driving your business in that direction. It may be small in the beginning, but it’s key to your future. And I can assure you, it’s as much about who gets the value in the future from these innovations as it is the innovations and the total value created itself.

So if you start doing these things with your organization, with your talent, with simplicity to begin consumer and measuring for success, then I think you’re a long way in building the kind of organization that’ll be successful.

SARAH GREEN: Saul, thank you so much for talking with us today.

SAUL BERMAN: It’s been great, appreciate the opportunity.

SARAH GREEN: That was Saul Berman, he’s the author of the new book, Not for Free: Revenue Strategies for a New World. For more, visit hbr.org.