In this introductory essay, Amit Mehra, Associate Professor and ISB Research Fellow and Joint Executive Director, Srini Raju Centre for IT and the Networked Economy at the Indian School of Business, outlines how emerging trends in digital media are transforming businesses.
When one thinks of digital media in the Indian context, deep discounts offered by e-retailers such as Myntra, Jabong and Flipkart invariably come to mind. However, a keen observer soon realizes that digital media is not simply about e-retailing. This raises the question what exactly
is digital media and how does it impact business? A direct answer is not readily available, rather one is confronted with a dizzying array of buzzwords like ‘big-data’, ‘web analytics’, ‘mobile’, ‘display advertising’, ‘social networks’ and so forth that are mentioned in the same breath as ‘digital media.’ One naturally wonders whether all of these different buzzwords are connected to each other in some logical fashion, or whether digital media is just a loose, all-encompassing term that refers to very different phenomena that have no real connect with each other.
Rethinking Impact of Digital Media on Business
believe that there is some hope in making sense of the superfluity of buzzwords that are used in the current context. As often happens, these buzzwords are not the right place to start thinking of the impact of digital media. Rather, it is better to make sense of digital media on today’s economy by considering:
- Opportunities for traditional businesses
- Creation of new types of businesses
- Competitive pressures created by these new
- businesses on traditional businesses
The opportunities for traditional businesses typically arise due to an improved ability to know their customers at a very granular level; sometimes even in real time. This could be due to the usage of smartphones that allow tracking of the location of individuals, or due to revelation of customers’ preferences through usage of social networking sites such as Facebook and Twitter. This individual specific information is a goldmine of data that can be exploited to target customers better through coupons, or different forms of advertising like display advertisements, sponsored links or mobile advertisements. A lot of innovativeness is possible in each of these kinds of advertising. For example, one can track a customer’s route of travel to and from work and can send coupons based on what route s/he is taking. Some recent research has shown that a customer is more amenable to coupons rendered on smartphones when s/he is taking a different route to the routine route of travel. More details about this research are presented by Professor Anindya Ghose (“Tracking Mobile: The Rise of Smartphones in Marketing”) elsewhere in this issue of ISBInsight.
It is better to make sense of digital media on today’s economy by considering the following: opportunities for traditional businesses, creation of new types of businesses, competitive pressures created by these new businesses on traditional businesses.
Another example of an innovative use of customer data is rendering of display advertisements based on the knowledge of who the advertisement is being targeted at. Such possibilities have led to creation of ad-exchanges like Admeld where advertisers bid for the chance to show an advertisement based on information about the prospective customer. Of course, all the steps from data collection about the individual, to processing of this information by potential advertisers to determine the bid, to finding the winning bidder and then the rendering of the advertisement by the winning bidder to the prospective customer must happen in real time in about 200 milliseconds. Clearly, this requires a technology architecture that can achieve this feat as well as the ability to process high volumes of data in real time. This is a great example where one can see the role of ‘big-data’ in the digital media space. Digital media is also the driving force behind many new types of businesses. At one level, one can think of new businesses that facilitate the usage of digital media by traditional businesses. Social media networks such as Facebook and Twitter;and Google can be classified into this category. Of course, these businesses are extremely innovative in providing an engaging platform for individual customers. The activity of individuals on these platforms creates new ways to elicit personal information which can then be harnessed to provide value added services to the traditional businesses. This does pose a threat to privacy and such businesses have to be extremely cautious and must be seen to have taken all precautions to protect individual information.
All the steps from data collection about the individual, to processing of this information by potential advertisers to determine the bid, to finding the winning bidder and then the rendering of the advertisement by the winning bidder to the prospective customer must happen in real time in about 200 milliseconds
Making New Businesses Possible
Digital media is also responsible for creating entirely new kinds of businesses. One such type of business is based on digitisation of content to create digital goods which can then be sold to customers. Examples are music and news content. It is observed that there is some commonality between the revenue models adopted in these kinds of businesses. Thus, Last.fm, a provider of music content, allows subscribers free use of its basic services, but asks them to pay a subscription fee to use premium features. Another example is paywalls used by online versions of newspapers such as the New York Times. In this revenue model, customers are allowed to read a pre-specified number of articles during a fixed period, for instance a month, for free. When customers want to read more articles than the specifi ed number, they have to pay a fee. This kind of revenue model is called the ‘Freemium’ model and clearly, it is an interesting question to understand how this model should be implemented for maximising a business’ revenue potential. Professor Jui Ramaprasad (“Freemium Uncovered: The Cases of Music and Mating”) throws some light on this issue.
Another new kind of business fostered by digital media is based on the platform model. In this model, the business provides services to create a market, i.e., it enables buyers and sellers to transact. Typically, e-retail businesses started off with the merchant model where the seller owned the inventory, and priced the products just like in a traditional business. Over time, however, many of these businesses have matured into a platform where they enable third party sellers to list their products on the platform, which attracts the buyer traffic. Here, the inventory is not owned by the platform, but by the sellers that are listed on the platform. In India, current examples of the platform model are Amazon and Flipkart, while an example of the merchant model is Myntra. While platforms can be used to sell physical goods, a very innovative use of the platform model is to sell services. Thus, Airbnb is an example of a platform that allows owners to temporarily rent out their houses while they are away. Such a business requires innovation at two levels: one, there should be a way to easily obtain the inventory availability in real time; and even more important is that homeowners should be willing to trust the person to whom the house is to be rented out. The friend network on Facebook provides a great proxy for how “closely” connected a would-be renter is to the homeowner. Another great example of selling services is in helping budding businesses/ projects to raise capital. Platforms like kickstarter.com or prosper.com provide such a service, and it is of immense value to understand how these kinds of platforms can assist in raising funds for deserving businesses while protecting the interests of the investors. Professor Sunil Wattal and others (“Crowdfunding: The New Wave of Financing for Entrepreneurial and Social Initiatives”) explore these aspects of crowdfunding in this issue of ISBInsight.
New businesses that are enabled due to digital media are changing the competitive landscape for traditional businesses in ways that have not been witnessed before. This creates new challenges for traditional businesses which they are sometimes unable to deal with even if they provide a high quality product at reasonable prices to their customers.
New Challenges in the Digital Era
New businesses that are enabled due to digital media are changing the competitive landscape for traditional businesses in ways that have not been witnessed before. This creates new challenges for traditional businesses which they are sometimes unable to deal with even if they provide a high quality product at reasonable prices to their customers. My own research (Mehra A, Subodha Kumar and Jagmohan S Raju, 2014) in the e-retail space shows how the business model of brick-and-mortar retailers is getting disrupted by competition from e-retailers. This happens because of the surplus seeking behaviour of sophisticated customers, who, armed with smartphones and the ubiquity of the Internet, are able to search for products and prices at the click of a button, leading to very low search costs. Imagine such a customer wants to purchase apparel. S/he may not want to purchase it at the website of an e-retailer because s/he is unable to figure out important features of the apparel like fit and texture. So, s/he visits a brick-and mortar retailer to assess these features through physical inspection and identify the product s/ he likes, but then purchases it from a competing e-retailer if it offers a lower price for the same product. This type of customer behaviour is called ‘showrooming’. Trade news from the US suggests that several brick-and-mortar retailers like Target and Best Buy are struggling to counter the effect of showrooming on their sales. Using a game theoretic analysis, we analysed the effectiveness of various options to counter showrooming. Retailers such as Target espouse using pricematching guarantees, but we find that this strategy has limited potential. On the other hand retailers like Macy’s suggest maintaining exclusivity of product assortment (so that the products they carry may not be available at e-retailers). We find that, this strategy can indeed counter showrooming effectively. We also study another approach implemented by retailers like Costco where they make showrooming harder by creating a situation where a customer who selects a product at a brick & mortar store cannot easily find the same product at an e-retailer. Costco implements this strategy by switching the manufacturer bar codes on the product with its own bar codes. This precludes the possibility of using smartphone apps to easily find matching products at the E-retailer’s website by swiping the manufacturer barcode on the app. We show that when the products have fewer digital attributes (means that fewer features that can be assessed online), then the strategy of using product exclusivity is better than the barcode switching strategy and vice-versa.
To conclude, digital media impacts businesses by leveraging highly granular customer level information to create value. Innovativeness in inducing customers to disclose their information, and the ability to tap this customer level information are central to the ability to benefit from digital media.New business models are also endangered due to digital media and the impact of these new businesses on the established ones is very profound. Often the competitive is skewed towards new players, leading to disastrous consequences for traditional businesses. In this issue of ISBInsight many scholars have contributed articles that showcase cutting edge research on the impact of digital media on business. I am sure you will enjoy reading them.