3/2016 – Internet causing tsunami of changes in business

by Tan Thiam Hock

Saturday, 23 January 2016

I love watching movies. Especially well directed action movies with great acting and even greater action scenes. You know straightaway who the good guys and the bad guys are. No brainer stuff. Most of the time unbelievable but who cares? Pure entertainment equals pure relaxation. An enjoyable distraction from daily living stress.

Then I watch drama movies like The Big Short recently. A simple story about shorting the housing mortgage market in USA which is actually just betting that the housing mortgage market will collapse. So new derivatives (paper instruments) were created by Banks for these shorters to bet against existing derivatives which was created to resell packages of housing mortgage loans. If you do not understand, don’t worry. Me too.

What I do understand is how greed in Wall Street created a fraudulent system of false values out of trading papers backed by rating agencies. Greed feeding on greed. Basically a business model which is created out of thin air is definitely not sustainable and will crash and burn.

Call me an outdated traditional businessman. I believe in the old fashioned business model of buying and selling of goods and services. So you can imagine my difficulty in trying to cope with the new business economy in this Internet era. Despite asking my son ( MFinance) many searching questions and getting many exasperated answers, I still don’t get it.

Like how a loss making Uber which is basically an app service keeps getting higher valuation. The more they lose, the hIgher the valuation. Mind you, Uber is backed by smart Wall Street seasoned investors so they must know something that I don’t. I feel outdated and stupid.

I remember reading American financial management books some 35 years ago in our once great University of Malaya that valuation is calculated based on multiples of profits earned. Profits not losses. Valuation goes up if future profits has the potential to go up. Not future losses. Welcome to the new economy of doing business on web.

If you can filter through all the newly created jargons of the Internet business, you will realize that it is just a new approach to the traditional world of buying and selling of goods and services. The main difference is that Internet and digital technology has provided a new trading platform to facilitate trading. It is just a more efficient distribution platform to connect buyers and sellers.
The big picture of borderless trading and the world is your market place is becoming a reality.

You would have seen by now, all Internet models are out to disrupt traditional businesses. To make money, Internet strategies must must find its niche in the traditional value chain. Most of the time, no value is added to the value chain. More often, it shrinks the value chain proposition as it takes away the middleman role. Increased competition creates lower prices to grab market share leading to further erosion of the value chain.

So what kind of Internet business models make money? Sorry, please excuse this Chinaman. The right word should be how do Internet business monetize? I believe it really means getting income or revenue as we use to call it. If you notice, most Internet business do not mention profits as their revenue if anything at all, is still not sufficient to cover their operation costs.

The most popular Internet business model is the brokerage model. Making a commission out of introducing buyers to sellers. Competing with traditional businesses and slowly putting the inefficient incumbents out of business.

Like Uber introducing new taxis and offering lower prices and better services. Property and car websites reducing the selling agent’s role. Alibaba’s and Amazon’s virtual marketplace bypassing traditional brick and mortar retail distribution channels. PayPal as a transactional broker providing third party payment mechanism. The brokerage business model can make money if it is more efficient and it delivers better value for money proposition to existing customers in the value chain.

The other hotly contested space is the advertising model where the traditional media faces strong headwind against the Internet model. As Internet consumption increases, advertisers will move their advertising budgets to where their target customers spend their attention. Google and Facebook have taken increasing share of advertsing revenue from TV, newsprints and radio. Classified advertising was the first to be disrupted by specialized property and car websites. The fight for eyeballs and ears is constant and never ending.

Even broadcaster Astro with a subscription and advertising business model is under threat. With Netflix and HBO offering lower subscription for watching movies on demand over Internet, we might see an unbundling of viewing packages resulting in lower ARPU’s. It’s radio stations which are all music formatted stations will see declining listeners as more customers subscribe to Spotify, listening to their favourite songs wherever and whenever minus the DJ’s endless chatter.

Strong traditional businesses do not just wither away and die. Barnes and Noble evolved into a click and mortar business model, complimenting its physical bookstores with an online service of selling books and e books. Best of both worlds offered to different customers. Tesco offers online ordering and delivery to homes. New shopping apps work with smaller retailers for personalized shopping and home deliveries.

Newspapers improve their contents and packaged it with online copies. Star Media Group invest in property and car websites to compete against pure Internet players. Astro and Media Prima increasing their local content to retain TV eyeballs. BFM Radio offering intelligent business insights on air besides music.

The Internet disruption has started and it will cause a tsunami of changes. Traditional businesses should embrace this challenge, evolve and create a new business model that will consolidate your incumbent strength and create new Internet based competitiveness to survive in the new economy.

As for me, I have further invested in the good old business of manufacturing physical consumer products. A business that the Internet will not disrupt just yet. Just try using a virtual lipstick on your lips and you will know what I mean.

Meanwhile I am back to watching the never ending drama story playing right before our very eyes. A political story of intrigue, betrayal, corrupted power, donations, greed, race and religion. Produced and directed by our Academy award winning top actor, it comes with a brilliant cast of fools and clowns.

The jealous Hollywood is just amazed by our diversity and acting abilities. We are indeed a blessed nation.

Published: http://www.thestar.com.my/business/business-news/2016/01/23/internet-causing-tsunami-of-changes-in-business/

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