In 1997, Reed Hastings envisioned a digital site where, for a fixed price, customers could watch an endless amount of movies. At that time the technical infrastructure didn’t exist and the viewing public, who had just become accustomed to DVDs, were simply not ready. But Hastings had a clear vision of the future, and he managed to start Netflix, albeit with a temporary business model. Using the good old-fashioned postal service, he rented out DVD movies via a subscription model. In 2011, when Hastings first dared to prioritize streaming and offer customers the opportunity to subscribe to only the digital service at a lower price, he was met by public outcry. 800,000 customers left in protest and the stock price dropped 77 percent in four months. In the long run, Hastings would prevail. In April 2017, Netflix reported about 93 million paying customers worldwide. Thanks to its temporary solution – and the courage to move on to the next business model – Netflix managed to successfully challenge both themselves and the market. They were perfectly prepared for the coming streaming explosion with a core of faithful users, large amounts of behavioral data, industry contacts and, perhaps most importantly, an excellent recommendation engine. Netflix created its own future market.
Robert Wolcott, Professor at the Kellogg School of Management, calls the phenomenon “temporary business ideas”: A company deliberately launches a business concept that cannot last – and uses that window of time to build a position and assets in anticipation of market changes.
Uber has clearly stated that their existing business model, based on freelance chauffeurs, is a temporary solution in expectation of self-driving cars. Google has invested in Nest in order to sneak a thermostat into the smart home of the future. PayPal’s founder, Peter Thiel, said in 1999 that in the future we would all be like mini-ATMs with digital wallets in our mobile phones, but at the time he could only launch a temporary payment solution based on credit cards where users could “beam” the program with their Palm Pilots. Today, over 200 million people use PayPal’s significantly more advanced mobile payment systems.
Fast-moving markets are difficult to assess. But by investing in temporary business models, prospective companies can be at the forefront of the next development stage. More start-ups than established giants invest in temporary solutions. It seems that younger companies are more likely to put energy into understanding the user needs and market structure of the future. For those companies in the midst of digital transformation, this can be an important lesson. Mark Zuckerberg annually convenes all of his employees and partners to present a detailed 10-year vision of how the market will evolve and what role Facebook will play in it. Is he always right? Certainly not, but this provides direction and instills the courage necessary to create temporary business models that will lead to the next success.
What is the difference between a temporary business model and ordinary experimentation? It’s about deliberately creating an in-road to an expected market. It demands an understanding of the direction forward to make the right investment – and the flexibility to adapt as reality unfolds.
Many companies are currently stuck in business models that have served them well for many years, but which are not watertight solutions for tomorrow’s market. If the giant step into the digitally transparent ecosystem of the future is too complicated, perhaps a contemporary version of Hasting’s DVD rental is what could save them.
Published in Dagens Industri, November 2017