Steve Jobs often said that someone early in his career told him, “Manage the top line, which is your business strategy, your people, the talent that you have, your products. Do all that stuff right and the bottom line will follow.”
And that has certainly been the case for Apple. But why this adage has such resonance today is that so many companies do it precisely the other way around: They focus on the bottom line.
What’s the difference? Start with the basic definitions. Both expressions, of course, refer to a company’s Profit and Loss Statement. On that statement, the Bottom Line is the net income, earnings or return on income. These figures are the hard truth. It’s the profitability you deliver to your shareholders.
Then there’s the Top Line. This normally refers to the income received for products and services before expenses are taken out. And what so many executives forget is that the Top Line indicates how well you are serving your customers. It shows if people are buying what you’re selling.
Entrepreneurs, like Steve Jobs, tend to be Top Line people. They inspire people with their vision, some new way to add value and create wealth. When that vision materializes into products beneficial to customers, revenue begins to flow.
The problem is that most entrepreneurs aren’t Bottom Line people. They tend to overspend on fulfilling their dream. And those slightly less idealistic people who invested money in their venture want a return.
So they bring a Bottom Line person to the dance. This is a CFO or CEO appointed by the board to reign in said entrepreneur. In other words, adult supervision.
Within the toddling venture there is usually an epic battle between the Top Line visionary and the Bottom Line realist. And the Bottom Line always wins out. Because the investors vote with their wallet. As long as the original idea behind the company has legs or is unique in the marketplace, their Bottom Liner can squeeze growth and profitability out of it.
Bottom Line executives figure out how to get more milk out of the cow, while feeding it less and less. This delivers more profitability. It also usually ends up killing the cow.
Why? Because professional CEOs are organization people, not visionaries. They’ve climbed the ladder by delivering great numbers. New ideas? Not so much.
Eventually, the original idea will become common place, a commodity that can be replicated by others. Then, the only way to compete profitably is to differentiate the product—come up with something new.
But wait a second, creating something new takes vision and an understanding of why consumers valued the original idea in the first place. And that went out the door with the company’s founder.
This is where visionless companies with deep pockets launch a flock of flawed products and stand back to see if any of them takeoff. They’ll also copy someone else’s products or services. Can anyone say, “Zune.” Professionals call this diversification. I brand it desperation. Companies with shallower coffers will simply try to sell themselves off to the highest bidder. Either way, what made the company successful in the first place is gone.
But this death cycle is not inevitable. Companies, like IBM, have reinvented themselves by bringing in a CEO with vision, such as Lou Gerstner. Or in Apple’s case, returning the original visionary, who could restore the company’s values and innovative drive. In other words, refocussing on the Top Line.
That said, Steve exaggerated. Go figure. Successful companies like Apple don’t just focus on the Top Line. They never take their eyes off either the top or bottom lines.
A large part of Apple’s success is that it took away Profit and Loss responsibilities from its divisions: no general managers. Instead, Apple consolidated attention to the Bottom Line in world-class Operations and Finance teams lead by Tim Cook and Peter Oppenheimer. Those teams helped Apple consistently deliver best-in-class profit margins.
The beauty of Apple’s organization is that it compels the rest of the company—Design, Engineering, Marketing, Sales—to focus on the ever so important Top Line. Which, of course, is serving customers through a continuous flow of innovative products and services that deliver on the company’s core values.
Steve’s point was that the Top Line is on top for a reason. Those companies that put the Bottom Line first are like an hourglass that’s been flipped over. It’s only a matter of time before their fortunes run out.
Earlier this year, Walter Isaacson, former managing editor of TIME, wrote a cover story (“How to Save Your Newspaper,” 5 February 2009) in which he describes a “crisis in journalism” that is leading to the closure of some U.S. newspapers. In spite of more people reading the news, less people are paying for it. They’re getting their news online for free. And, according to Isaacson, “this is not a business model that makes sense.”
In fact, throughout the media industry, the existing giants struggle with this same problem: Their business models just don’t work. With the rise of the Internet, demand for information and entertainment is higher than ever. But the new generation of net surfers just don’t seem to want to reach into their wallets. Or do they?
Technology, in this case the Internet, hasn’t changed what people want; it’s changed how they want it. To come up with a new, viable business model, media companies must first separate the value they provide from the product they use to deliver that value. Take newspapers: news is the value and paper is the distribution vehicle.
A viable business model packages and distributes the value offered in a way appropriate for the times. Customers pay directly for some forms of that value. At other times, they pay indirectly through viewing advertisements or sponsorships. And some things they get literally for free, to build the brand awareness or value attributed with a particular product or service. But all of these packages should fit together neatly into an overall business model that leaves the customer feeling satisfied and remunerating the creator for the value they’ve created.
Changes in factors—such as technology, the environment, politics, economics—will radically disrupt the fit of that model. So as circumstances change, existing business models must also change. Trying to prop-up and artificially defend an existing business model will lead to a revolution, as new players offer customers something more appropriate and satisfying. Take a look at Forbes list of billionaires, many of the self-made ones are people who found a new model for satisfying an existing need.
Dancing to a different tune Nowhere in the media industry is the need for a new business model more obvious than in the music business. The value we receive from the music business is…music. In other words, it’s the songs and performances. Products are how musicians deliver that value to other people, the audience. The most immediate way to package the value of music is through a live performance. Even live there are the nuances of the venue: stadium, concert hall, auditorium, small club. The second most timely way to hear a song has been through the radio, what we would call streaming today. Historically, radio went from broadcasting live performances to playing recordings. In the 1980s came MTV, and we got the recording along with video images, which arguably either enhanced or detracted from the music. Finally, there was the real money-maker, the recording itself.
And that is where the record companies (as you might guess from their name) really focussed their attention. As far as they were concerned, everything else was ancillary to selling records, then CDs—because that is where they made their money. To the record companies, live performances, radio air play, videos—those were all just marketing tools for selling CDs.
Many musicians are wrapped up in the nomenclature of the record industry. No longer were they just making music, but they were producing an album, made up of tracks. And that album had to have one or more singles. Some of these would be A-sides and others B-sides. Songs were merely tools for selling the ultimate product, an album. Tours were in support of an album. Music had gone from a song written and performed for an audience to a way to get a recording contract and producing a packaged product bought by consumers.
But several disruptions occurred. Along with the introduction of CDs, music became produced, stored and distributed digitally. Later, the rise of the Internet provided a means for easily duplicating and sharing digital files. Yikes! People were getting the recording without paying for it. The record companies began to freak out because this completely screwed up their business model. They claimed that such free distribution of music was destroying the industry. Sharing music digitally robbed musicians of the rewards they deserved for their creative efforts.
But wait a second. If you’re a musician, don’t you want as many people as possible to enjoy your music? Having your song played constantly on the radio is a good thing. So shouldn’t any means for rapidly spreading and popularizing your music globally be a boon to musicians?
Of course. File sharing could and should be a fantastic marketing tool. The disruptive effect of digital file sharing should be to rework the business model of the music industry. Instead of live performances supporting the sale of the album, the recording should motivate people to pay more for a live performance. And the music itself could itself be creatively packaged in new ways, for example, the plethora of musicals following the success of ABBA’s Mama Mia. There could be many ways to deliver value beyond simply distributing the recording on a disc.
But for the most part, the music industry has resisted revising their business model to fit a digital world. Instead, they have tried to obstruct the distributive power of the Internet and force people to stick with buying a physical product. Why? Because it’s the production and distribution of that physical CD that binds musicians to the record companies.
Apple bytes at the opportunity iTunes, on the other hand, is a shining example of a new business model for the music industry. Apple looked at why people were downloading music files from the Internet. And, unlike many in the music industry, didn’t assume it was just people trying to get something for nothing. After all, if you actually tried Napster or Pirate Bay or another file sharing service, it isn’t so easy to get just the song you are after. And the file quality can be very hit or miss. Apple, on the other hand, assessed that people loved the immediacy of being able to quickly get from the Internet the songs they wanted. Apple also believed that given a viable legal option for downloading music, plenty of people would take it. They were right. And today, iTunes has rapidly become the largest music retailer in the U.S. (according to NPD Group’s MusicWatch survey).
But why Apple? While the iPod was being used more and more to listen to music, the company didn’t have any significant role in music retailing. In fact, as part of multiple trademark agreements between Apple and the Beatles’ Apple Corps., the computer maker had agreed to stay out of music distribution entirely. [Apple and Apple Corps. settled their trademark dispute conclusively in 2007.] But Apple smelled a business opportunity, if they could use their user interface expertise to make music downloading easy and get the business model right, consumers would would pay for it. Plus, combining music content with Apple playback hardware further enhanced their existing business model.
Apple struggles with the music companies, who control the rights to songs, to keep the service simple and focussed on what users value. The iTunes business model is built on a few key principals. First, songs and not albums are the principal chunk by which online consumers want to get their music. Second, the song files themselves are of a consistent, high quality and download reliably. Third, the library of songs needs to be large, featuring all the popular artists and be easily searchable. Fourth, consumers want to own each song, not subscribe to a library and pay a subscription fee. So songs need to be priced consistently and have understandable usage rights. Finally, the iTunes store is accessible directly through the iTunes jukebox software so that buying songs is the simplest way to get music onto your computer and into your iPod.
Over the years, Apple continues to add more valuable features to iTunes: Better ways of finding new music, such as user and celebrity contributed playlists. There are recommendations and “Essential” playlists by genres, artists or for particular occasions and activities. Album artwork is used as a visual tool for searching and organizing your music. And a new “Genius” feature makes recommendations based upon your listening and buying behavior. All of these enhancements increase the value of purchasing your music online from iTunes.
The important lesson from the iTunes store is that Apple has not changed the value of the offering: it’s the same music you can purchase on a CD. What Apple did was build a new way of delivering that value, creating a business model that is suited to downloading music over the Internet.
In addition to changing music distribution, digital technology has made it no longer hugely expensive to produce and record music. So if record companies no longer control the distribution channels for music and are not necessary to fund recording sessions, who needs them? Probably nobody, at least in their existing forms. But musicians still need help marketing and managing themselves as brands. Music companies will need to transform themselves into full-service management companies.
Change or be left behind For example, in 2007 Madonna ended her relationship with record company Warner Music Group Corp. and signed a10-year all-encompassing agreement with the world’s largest concert producer, Live Nation. “The paradigm in the music business has shifted and as an artist and a business woman, I have to move with that shift,” stated Madonna in Live Nations’ press release (16 October 2007). “For the first time in my career, the way that my music can reach my fans is unlimited. I’ve never wanted to think in a limited way and with this new partnership, the possibilities are endless. Who knows how my albums will be distributed in the future?”
Reflecting a new business model, the partnership between Madonna and Live Nation encompasses all of Madonna’s future music and music-related businesses, including the exploitation of the Madonna brand, new studio albums, touring, merchandising, fan club/web site, DVD’s, music-related television and film projects and associated sponsorship agreements, according to the Live Nations press release.
Other musicians are welded to the old business model. For example, Björn Ulvaeus of ABBA wrote that file sharing was “‘lazy and stingy.” He argues that “‘an idea would only see the light of day if copyright holders and their financiers knew they stood a chance of getting paid for their work” (from a translated report in The Local17 Feb 09). Ulvaeus and his writing partner, Benny Andersson tightly manage the use of their copyrights. For example, they only allowed Madonna to sample their song Gimme Gimme Gimme for her 2005 song Hung Up once they felt it would be a hit. Till then, despite many requests, Andersson and Ulvaeus had only allowed the Fugees to sample The Name of the Game for their 1996 song Rumble in the Jungle (Telegraph.co.uk, 19 October 2005).
This is ironic, since Ulvaeus and Andersson have been extremely adept at repackaging their music into a form other than the original recording,with the live musical Mama Mia. Ulvaeus and Andersson own half of Mama Mia,which reportedly made pre-tax profits of £8m in 2005 and £11m in 2006 alone. Not bad for music written more than 30 years ago. Shouldn’t coming up with new, revenue forms for their music make ABBA less reliant on selling their recordings? Further, file sharing could actually increase the popularity of their music amongst a new generation of listeners.
In fact, the music industry’s reaction is similar to other industries whose existing business models have been disrupted by the prevalence of the Internet. In particular, the Internet’s facility for enabling two things: sharing and collaborating. This is nowhere truer than in the world of software.
Pirates or promoters In 1976, then 21-year-old Microsoft co-founder Bill Gates wrote a now famous “open letter to computer hobbyists” in which he complains that hobbyists “steal your software” and view software as “something to share.” Similar to ABBA’s Ulvaeus or TIME’s Isascson, Gates complains that by sharing software hobbyists “prevent good software from being written.” He asks, “Who can afford to do professional work for nothing?”
But 30 years later, Gates is the world’s richest person. Yet not by developing software for hobbyists who share it, but from selling software to businesses and governments. The software business model seeks to eliminate professional piracy, but for the most part ignores individuals, since it is cost prohibitive to hunt them down. In reality, software piracy can be one of the best ways to enhance the popularity of an application.
Piracy can be akin to product seeding and placement. Companies often give products for free or at a discount to celebrities that could easily afford to buy them. They do this for the marketing exposure. The same is true when your product becomes a popular target for piracy. Piracy can be a great form of viral marketing.
The trick is to coexist and leverage piracy; better yet, include it in your business model. Once everyone is using your software, concentrate on a revenue stream from those people who need to be legal. You can also bundle your software with hardware.Apple has developed and acquired applications that run only on a Macintosh. Even if these applications are pirated, everyone using them still has to buy a Mac. Microsoft sells Windows to PC makers who bundle it with their hardware. Other software companies have successfully bundled their applications with necessary peripherals; think Adobe or Pinnacle.
So it is not surprising that a seasoned technology company, such as Apple, would see a way around piracy in the music industry. They’ve closely linked digital music with their hardware, iPods. They ignore the individual file-sharing pirates and concentrate on those people who are willing to pay to legally download music. By making the iTunes experience of a consistently higher quality than file sharing, they provide a value that most people are willing to pay for.
The traditional record companies, on the other hand, consider that every time a teenager pirates a song from the Internet, they loose revenue. Instead, they should leverage this desire to share music as a catalyst for growing revenue overall. Sure, there will always be somebody who finds it worthwhile to pick Oranges off of someone else’s tree. But most of us find it much more cost-effective to simply buy one at the supermarket. Name one artist or song that is heavily pirated and isn’t also a big seller.
I agree with Cory Doctorow that the music industry would be much better off coming up with a copyright solution for file sharing services. He uses old-fashioned juke boxes as an example. In this case, the performing rights organizations, ASCAP, BMI and SESAC, which represent most copyrighted songs in the U.S. have created a single Jukebox License Agreement “which provides total access to all songs” in their respective repertories. This license will cost a Jukebox owner between $101 to $434 per jukebox, per year. It’s not difficult to imagine that a similar licensing agreement could be made for file sharing services.
Collaboration is key Besides sharing,the music companies and other media companies need business models that leverage the Internet’s facilitation of collaboration. For the software industry, this equates to Open Source software, such as the Linux operating system. Open Source stands for any software in which the original source code is made freely available so that it can be modified and improved collaboratively. Such collaboration generally creates good software. The more people testing and de-bugging your software the better. But why, contrary to Bill Gates assertion, would thousands of Open Source programmers do professional work for nothing?
One reason is that the value of a software engineer’s work is good software. Paying to license that software is only one way to compensate for that value. And, in this case, restrictive software licensing can be a hinderance to the type of collaboration that produces good products. [Another example of professional work seeming done for free is Wikipedia, the online encyclopedia that is written collaboratively by a global community of volunteers.]
It’s not that thousands of Open Source programmers are doing professional work for nothing. It’s that they work within a new business model. Rather than be paid for licensing their software, their remuneration most often comes from installing, maintaining and modifying the software for specific customers.
Even Microsoft’s previous partner and at one time the world’s largest software developer, IBM is now a leader in the Open Source movement, proclaiming itself “one of the top commercial contributors to Linux, bringing over 15,000 Linux customer engagements” (www-03.ibm.com/linux/). IBM, a company whose success was built on proprietary intellectual property has shifted its business model to generate revenue by solving problems for its customers using Open Source software.
Relating Open Source back to the music industry, already the recording of a song has become less important as a revenue generator for artists than the performance of that song. The majority of artists cited as top earners by Rolling Stone magazine in 2005 made most of their money from touring. U2, 2005’s top earner at $154.2 million, grossed approximately $139 million of that on the road (Brian Hiatt, “The Richest Rock Stars of 2006” 10 March 2006). Several of these top earners are in their sixties—The Rolling Stones, Paul McCartney, The Eagles, Elton John, Rod Stewart, The Police—yet continue to tour. The music industry should leverage further listener’s willingness to pay a premium for live performance.
Rather than try to tightly restrict the use of their songs as intellectual property, the music industry should use the Internet to facilitate cooperation, similar to Open Source and Wikipedia. My musician friends all tell me that collaboration is what they enjoy most about music. My pal Graham Cooper points to the 2007 Danish documentary Good Copy Bad Copy (www.goodcopybadcopy.net) for several examples of how creative and exciting sampling and restricting music can be.
What should be clear for the the music industry and virtually all existing media companies is that the Internet has disrupted the marketplace and demands new business models. Successful companies will deliver their value in ways that leverage sharing and collaboration, not restrict these hallmarks of the Internet behavior. Ultimately, such new business models will reward performance over intellectual property rights. In other words getting paid for what you do with your creativity, and not merely what you did in the past.
But does this suggest something further? By diminishing the value of intellectual property over performance does the Internet shake up the existing capitalist model, where the greatest money making potential resided in generating capital not in the product of labor? That is a topic for another rant.
What drives our economic behavior? Is it a primal desire to work our way up Maslow’s hierarchy of needs? Or is it something more sinister, pure greed? Is enough, enough or is enough, really never enough?
One’s view of human motivation shapes our perception of other people. It particularly determines how we organize ourselves into a community. In the States, we often establish explicit rules of what you can and cannot do. There is an assumption of a lack of common understanding, so everything must be spelled out explicitly, and preferably by law. Whereas in Sweden, they often take a laissez-faire approach, assuming a common notion of how things should be done.
For example, last friday I was amazed to see a traffic signal at a very busy Stockholm intersection out of service for the whole day, yet no traffic cops on the scene. Instead, most people seemed fine slowing down and yielding appropriately to other traffic. Some German towns have even experimented with removing traffic signals altogether so that drivers pay closer attention to other vehicles. Of course, such lack of traffic controls would lead to bedlam in Paris, where traffic regulations are often considered merely a recommendation by parisian drivers. Whether on the road or in the marketplace, we make assumptions of how other people will behave.
And those assumptions are not universal, but embedded in the particular culture of a community. Americans can’t believe that the French would sacrifice greater economic productivity for a shorter work week: “The French are lazy!” The French, on the other hand value their free-time and meals as important to a quality of life that is superior to the American “rat race.”
Of course, even within a national culture individual motivations vary. I have friends at high-tech firms that even after making millions of dollars, don’t believe they have enough to quit their jobs and do something more psychically or spiritually rewarding. (I’m not referring to those who are already doing what they love to do.) I also know people working in Education that sacrifice the potential of greater remuneration for a shorter work week and three months off in the summer. Yet despite such individual variation, economic systems—like traffic systems—are built on assumptions of how most people will behave.
So what is it, need or greed that makes people decide whether or not to lay their money down? It’s neither. And it’s both. To successfully market a product, you need to match the value of the product or service with what motivates your customer’s behavior. Few of us had a pent-up demand for mobile phones, iPods or personal computers before they were widely available. Did we actually “need” these products? Not initially. Did we lust for them just because someone else had one? Not exclusively. We bought one because the values they promised—freedom, amusement, connectivity, productivity—matched our own desires.
So success as a marketer depends on three things. First, how well tuned you are with the motivations of your target customer. Second, how well your product feeds or satisfies these desires. Finally, how well you communicate the alignment of the product value with the personal desires of your customer. And all three of these factors are effected by culture and individual circumstance.