Nov 21

Tim O'Reilly

Tim O'Reilly

Two Great Followups on Business Models Post

Not everyone reads comments, so I thought I'd highlight two of the comments on my recent post, Insight into Future Business Models.

Srini pointed to a Business Week article entitled WalMart with Wings, describing how Ryanair gives free or heavily discounted tickets, but then charges passengers for services, sells them goods while they are in the air, sells advertising, and is even eyeing the lucrative possibility of in-flight gambling:

O'Leary's secret? He thinks like a retailer and charges for absolutely every little thing, except the seat itself. Imagine the seat as akin to a cell phone: It comes free, or nearly free, but its owner winds up spending on all sorts of services. Last year, Ryanair gave away 25% of its seats, a figure O'Leary thinks he can double within five years. In the not-too-distant future, he wants all seats to go for free....

Outrageous? You bet, but the strategy is working. Although its average fare is $53, compared with $92 for Southwest, Ryanair's net margins are, at 18%, more than double the 7% achieved by Southwest. "Ryanair is Wal-Mart (WMT ) with wings," says Nick van den Brul, an aviation analyst at Exane BNP Paribas in London.

Michael Schrage pointed to a Financial Times article entitled Why Giveaways are Changing the Rules of Business:

To the extent that business models can be defined as the artful mix of “what companies profitably charge for” versus “what they give away free”, successful innovators are branding and bundling ever-cleverer subsidies into their market offerings. The right “free” fuels growth and profit. Technology has successfully upgraded King Gillette’s classic “razor & blades” business model.

The article gives numerous examples of "cross-subsidization" allowing for "free" products, from Google giving away free applications subsidized by search advertising revenue, to financial services firms offering various free services to attract customers who "pay" by putting their money under management, to the Ryanair example cited above, but also points out that as with any case of cross-subsidization, from Microsoft to Airbus and Boeing, there are both anti-trust and trade issues to consider.

The long and the short of it: though some readers were skeptical, Srini and Michael turned up some strong evidence that the ideas I wrote about are well on their way to becoming mainstream, with some business mavericks pushing them further and faster than anyone might have expected. Stay tuned for a future that is very different from the past. The big question for entrepreneurs: what is the razor, and what is the blade?

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» Sponsorships, Subsidies and “Free” Content from Joe Wikert's Publishing 2020 Blog

Although this article on FT.com is from earlier in the year, it’s as relevant today as it was then. I missed it when it was originally published so I’m grateful to the folks on the O’Reilly Radar blog for pointing Read More

Comments: 2

  john s [11.21.06 10:25 AM]

speaking of business models probably best not to submit the whole thing to the Patent office:
Everything you wanted to know about Radar Networks, Inc.

Based on the patent:
- hosted sematic blogging service with email accounts for distilation of content all for $9.95
- also will be called hotnode.com,


[0007] Additional features and advantages of the invention will be set forth in the description which follows, and in part will be obvious from the description, or may be learned by practice of the invention. The features and advantages of the invention may be realized and obtained by means of the instruments and combinations particularly pointed out in the appended claims. These and other features of the present invention will become more fully apparent from the following description and appended claims, or may be learned by the practice of the invention as set forth herein.

[0008] In one aspect of the invention, a method of processing content created by a user utilizing a semantic, ontology-driven portal on a computer network is described. The semantic portal application provides the user with a content base, such as a semantic form or meta-form, for creating a semantic posting. The semantic portal utilizes a knowledge data structure, such as a taxonomy or ontology, in preparing a semantic posting based on the information provided by the user via the content base. The semantic portal application prepares a preview of a semantic posting for evaluation by the user. The semantic posting is then either modified by the user or accepted and posted by the user for external parties to view.

[0009] In another aspect of the invention, a method of sharing information on a semantic-based network is described. A semantic portal application intercepts an e-mail message via an outgoing mail server or an incoming mail server. It then creates a semantic object from the e-mail message by examining syntax of the e-mail message inline, for example by detecting brackets, colons, and certain keywords indicating data type. The semantic posting is then make viewable by the public.

[0295] In addition to the above, Hotnode does automatic social networking: Building a social network by simply analyzing the recipients on messages, and linking these together into a representation of the social network that they are a result of. This is a secondary viral feature: Belonging to such a network makes it more likely that a member will solicit his or her friends to join the network. Hotnode looks at the user's emails as they come through and builds a social network from them automatically, based on who they correspond with. The user can then search, visualize and communicate using this network. This is totally automatic--there is no need to send or reply to "join my network" messages anymore. Hotnode learns just by seeing who talks to who.

[0298] We are going to start by providing a the most powerful hosted blogging and wiki service on our platform, as well as a portal for our community of users. We provide semantic blogging, Website and Wiki services to individuals, groups, communities and organizations. We are the semantic equivelent of the Wikipedia or Everything2 (which we might consider acquiring or close collaboration with). Users get a basic blog and Wiki for free, without ads. We can also provide them with other semantic objects they can post to their blogs for various types of things. If a user accept ads then they get some additional free features. Users can opt-in to advanced features by subscribing to the Hotnode Pro service ($9.95/month) and paying a la carte fees for other optional additions.

  Hamish MacEwan [11.21.06 10:33 AM]

As one of those who might be considered skeptical in my comments to the previous business models post, I'd just like to clarify, that I am *extremely* skeptical with respect to the "information services funded motor vehicle."

The Ryan Air example (a variation on the cinema snack concession) further confirms the core requirement of the "give away the razor, sell the blades" model, exclusivity of supply of the variable purchase component.

Aircraft, razors, consoles, handsets, all currently can control the adjunct service supply, either by natural or legislative barriers (patents to prevent any cheaper blades being supplied), in a way that is not feasible for "information services" in an automobile.

In a response to another poster in the earlier post, you wrote:

"If someone offers a free or heavily discounted car in return for a five year commitment to the car's information services subscription, you're locked in by contract, whether or not the user could access alternative services."

The question is one of "commitment." When you fly Ryan Air, you are not compelled to take the adjunct services, in the handset case, you need not make a huge number of calls, in the razor case you can shave as much or as little as you choose. When you buy a console you can't buy any but the manufacturers games, but you can turn your X-Box into a web-server and never pay the "game tax."

The arrangement you describe is a conventional five-year vehicle lease with the sop of some "information services."

"why would the average user then seek out alternative free services if he's already committed to the ones he pays for?"

Because information services, like book publishers are not exactly fungible. And what would the enforcement provisions of such a contract involve?

"Give away the razor, sell the blades" models work only where there is some exclusionary capability for the "razor" provider to ensure the "blades" are their monopoly market.

This is what "open or closed has to do with the automobile discussion." Airliners are a pretty natural monopoly (closed), ditto for the other examples provided, but a motor vehicle clearly is not, and contractually obliging payments (not metered use of the "blades") is not the same model, its a lease with benefits (and not likely to be that good).

The model doesn't always work, remember CueCat

In closing, I'm not a skeptic (or a fan for that matter) of the "Give away the razor, sell the blades" model, but the automobile case is not an example of it.

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