Building Blox Redux
In Which the Author Revisits a Decade-Old Business Model
Assessment Framework to See Whether it Still Makes Sense
Assessment Framework to See Whether it Still Makes Sense
By Roger L. Kay
Back in the summer of 2000, the last hurrah for the Dot Com bubble, as it later turned out, I gave a
talk to members of the PC industry, which had been on a tear for half a decade and didn’t know
that it was about to go in the tank for a couple of years. Also not known was that another
renaissance would flourish from 2002 on, taking the PC industry to greater heights before it sailed
into the current doldrums.
In this talk, I presented a thesis with a chart. The thesis was that merely supplying devices, which
vendors did quite well, would no longer be sufficient to win. In addition, they needed to have or to
acquire — under their own roofs or via alliance — all the rest of the elements that make up a “total
solution.” Each building block represented all or part of a business model, a way to make money
selling technology. The chart depicted my best stab at the important elements of the day (Figure
1).
Figure 1
talk to members of the PC industry, which had been on a tear for half a decade and didn’t know
that it was about to go in the tank for a couple of years. Also not known was that another
renaissance would flourish from 2002 on, taking the PC industry to greater heights before it sailed
into the current doldrums.
In this talk, I presented a thesis with a chart. The thesis was that merely supplying devices, which
vendors did quite well, would no longer be sufficient to win. In addition, they needed to have or to
acquire — under their own roofs or via alliance — all the rest of the elements that make up a “total
solution.” Each building block represented all or part of a business model, a way to make money
selling technology. The chart depicted my best stab at the important elements of the day (Figure
1).
Figure 1
Old Wine in a New Bottle
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For context, it helps to keep in mind that the Internet was just waking up as a major force in the
mainstream market. Broadband penetration was still relatively low, and most people accessed
the Internet via a modem. Lots of new business models were being tried. Most of them, as it
turned out, didn’t work. Perhaps timing had something to do with it, as the Dot Com bubble
was just exploding into the recession of 2001.
However, competitors were sweeping up assets that strengthened their positions in each of
these areas, and a competitor risked being “flanked” by a rival if it didn’t have something down
in one of the blocks. Flanking could easily be achieved when a player was able to offer one-
stop shopping to a customer in one or more areas that an incumbent couldn’t. In other words,
a vendor able to offer a PC as well as Internet access was theoretically in a better position than
one able to offer only a PC.
I identified new types of competitors for PC vendors: carriers, Web services providers, retailers,
eCommerce firms, and even financial services companies. It was also clear that some of the
businesses were already commoditized (i.e., the lowest, grey tier in the building block stack)
and that only the upper tiers (purple, orange, and green) offered decent margins.
Having played out for nearly a decade, the scenarios described in the thesis can be assessed
with a certain amount of perspective to determine whether the basic idea had merit.
First up: the basic tenet; is it still valid? That is, are companies fighting a multi-front war in
which they need a play in each area in order to survive? Arguably, this piece is truer today than
before. The total product space has only gotten more crowded over time, with everyone getting
into each other’s markets.
A Closer Look
But how about the details? There, much change can be detected. Some things have lost
importance, and others that weren’t there a decade ago have gained prominence. The basic
conclusion is that, while a company may not need to control what happens in every block, some
will have a critical impact on the firm’s success.
So, let’s go over the blocks one at a time, modifying, nixing, and adjusting them as necessary.
We’ll start again at the Device category. Clearly, this is the heart of the business, and while not
nearly as profitable as it was a decade ago, hardware manufacturing remains key. One large
shift in the landscape has been the shift from in-house to contract manufacturing. Time was,
everyone did their own manufacturing. Now, almost no one does. Margin squeeze. However,
Apple still makes nice gross margins on high-end hardware, even if companies in Taiwan and
China make most of it. In a totally different market, rugged, Panasonic does the same (and still
makes its own hardware). Another change is the proliferation of form factors. It used to be just
desktops and notebooks. Now, there is a plethora of device types. Arguably, each type
represents a block or sub-block of its own. A company with desktops, notebooks, and servers
can take business away from another that offers only desktops and notebooks. But as a class,
devices still occupy center stage.
Pipes was another category. Pipes still exist. In fact, they’re more important than ever. As we
head toward cloud computing, the presence of ubiquitous, high-speed, and reliable bandwidth
is assumed. And the number of different types of pipes has grown. Wireless barely existed a
decade ago and here we have BlueTooth, WiFi, and WiMax to add to cellular data and satellite.
Many new pipe purveyors have arrived on the scene as well. As firms experiment, bundling
broadband services with netbooks, shades of the “Nearly Free PC” movement circa 1998 echo
down the halls. Clearly, gotta have pipes, even more so now.
Distribution was considered important before, a necessary but profitless requirement, a way to
get your products to market. Internet sales coupled with firms specializing in logistics,
warehousing, and transport (e.g., FedEx) have created a whole new channel that didn’t exist 10
years ago. But retail is much the same, albeit with fewer competitors, and indirect distribution
remains largely intact, although the VAR end of the spectrum has suffered disproportionately.
Ok, so distribution: table stakes.
ISPs, on the other hand, have all but disappeared. Nobody needs in Internet Service Provider
anymore. A few diehard souls are hanging onto their AOL accounts and accessing the Internet
by modem, but this breed is headed for extinction rapido. However, there is something in its
place. People still need service providers, and arguably the whole cloud computing movement
is about providing computing as a service, either as raw cycles (e.g., Amazon’s EC3) or as
finished output (Google Earth). So, lets rename this category something original, say, Cloud.
And Cloud is more important than Internet access was.
Moving up the stack, we have Brand. Brand was seen as a way to gain higher margins without
increasing variable costs. For a fixed investment, a firm had an opportunity to establish a
desirability for its products without changing the products themselves. In theory, it could charge
a higher price for its brand (e.g., Sony), even if the underlying technology was the same as what
competitors had on offer. Brand is still important. In some cases, Brand is all that a company
has to distinguish itself. And in the case of Apple, Brand is arguably the most important
element in its mix.
How about Finance? Finance is a piece of plumbing. Many firms in the technology industry
have strong cash flows and balance sheets brimming with short-term assets, even in this
troubled economy. Cash is the grease that keeps the wheels moving, and OEMs are the ones
to make the big bets, quarter after quarter, on what is likely to sell. Only the silicon providers
have to make bigger, longer-term gambles. Finance feels to me more like table stakes than a
differentiating factor.
The Services block referred to services such as break-fix and installation, but also to higher-
order services like resource optimization and other management services. In the past decade,
IBM has turned management services into the sharp end of the stick, using its Global Services
division to lead sales for its hardware, software, and finance divisions. Hewlett-Packard has
also turned Services into a powerful competitive weapon. Services are more important than
ever as hardware has become more of a commodity.
Now we reach the touchy-feely layer. Portals were all the rage in 2000. Yahoo reigned
supreme in the early Internet. All roads to the Internet led through Portals, doors through which
traffic had to pass (and be monetized!) on its way to wherever. Portals continue to exist, and
Yahoo still has the single most expensive front page from an advertising perspective. But
Portals are a pale shadow of their former selves. Why? In a word, Search. Google established
the idea that doors were unnecessary. Rather than monetize one huge solid oaken entrance,
Google figured out how, with Search, to make a million pages each have their own small value,
and, added together, they came to overwhelm the value of the single Portal. So, Portal remains
a category with some value, not as much as before, and Search joins the fray.
Ah, Content. Always a cipher, never understood. AOL-Time Warner is a testament to what didn’
t work: content and distribution under one roof. Yahoo experimented with Content (e.g., Kevin
Sites reporting from dangerous places exclusively for Yahoo), and some of it stuck (although
not the Sites site). Craig’s List is almost pure content (it sure isn’t form!). And the Hollywood
studios continue to range around the edges of the computer business, trying to figure out a way
to get their piece of the digital age without losing their shirts. Content is ultimately what users
consume. So, it must still be important. But Content is no longer just what the studios make.
User-generated content (e.g., YouTube, instant messaging and other communications,
videoconferencing) takes up an increasing proportion of the digital airwaves. So, premium
content, as it’s now called, still commands respect, but it is gradually being swamped by a
rising tide of homebrew. Also, an important sub-category of Content, Software, is not to be
overlooked. Operating software, like Windows and OS X, could be grouped with Pipes, but
many applications and databases are best described as Content.
Finally, at the top (for no particular reason) was a category called, quaintly, Options. Luckily, I
put a picture there or else I might not remember what this was. Today, we would call it
Accessories or Peripherals. Back then, with the margins bleeding out of Devices, Options were
seen as a refuge. Options carried higher margins at the time, but this state was only transient.
The Peripherals biz has been nearly as brutal as mainstream hardware. There have been
some exceptions, however. Using Endpoint Technologies’ definition of an endpoint as a
single-user device with an IP address and a human interface and a peripheral as anything
hooked to the endpoint that does not access the Internet directly, then the iPod is a peripheral
that has achieved a singular success. But vendors such as Logitech — which sells speakers,
cameras, headphones, mice, and keyboards as well as other peripherals — are struggling just
like the device makers. So, Options morphs to Peripherals and loses importance.
Basic Principle Still Holds
Where does that leave us? With a new set of building blocks and a thesis that still has some
validity, albeit with footnotes on exceptions and subtleties. Here’s how I would make the same
chart today (Figure 2). I’ve elevated Brand to the top. The rationale is that Brand rises in
importance as an industry matures. Content and Cloud represent key ways for a firm to
distinguish itself. Portals, Pipes, and Services are still important, but they don’t offer much in
the way of competitive advantage; everyone has a Portal, everyone needs pipes and alliances
here may not be all that valuable, and Services span the spectrum from table stakes to primary
differentiator. At the bottom, Devices, Peripherals, Distribution, and Finance form the workaday
base of the pyramid.
Figure 2
mainstream market. Broadband penetration was still relatively low, and most people accessed
the Internet via a modem. Lots of new business models were being tried. Most of them, as it
turned out, didn’t work. Perhaps timing had something to do with it, as the Dot Com bubble
was just exploding into the recession of 2001.
However, competitors were sweeping up assets that strengthened their positions in each of
these areas, and a competitor risked being “flanked” by a rival if it didn’t have something down
in one of the blocks. Flanking could easily be achieved when a player was able to offer one-
stop shopping to a customer in one or more areas that an incumbent couldn’t. In other words,
a vendor able to offer a PC as well as Internet access was theoretically in a better position than
one able to offer only a PC.
I identified new types of competitors for PC vendors: carriers, Web services providers, retailers,
eCommerce firms, and even financial services companies. It was also clear that some of the
businesses were already commoditized (i.e., the lowest, grey tier in the building block stack)
and that only the upper tiers (purple, orange, and green) offered decent margins.
Having played out for nearly a decade, the scenarios described in the thesis can be assessed
with a certain amount of perspective to determine whether the basic idea had merit.
First up: the basic tenet; is it still valid? That is, are companies fighting a multi-front war in
which they need a play in each area in order to survive? Arguably, this piece is truer today than
before. The total product space has only gotten more crowded over time, with everyone getting
into each other’s markets.
A Closer Look
But how about the details? There, much change can be detected. Some things have lost
importance, and others that weren’t there a decade ago have gained prominence. The basic
conclusion is that, while a company may not need to control what happens in every block, some
will have a critical impact on the firm’s success.
So, let’s go over the blocks one at a time, modifying, nixing, and adjusting them as necessary.
We’ll start again at the Device category. Clearly, this is the heart of the business, and while not
nearly as profitable as it was a decade ago, hardware manufacturing remains key. One large
shift in the landscape has been the shift from in-house to contract manufacturing. Time was,
everyone did their own manufacturing. Now, almost no one does. Margin squeeze. However,
Apple still makes nice gross margins on high-end hardware, even if companies in Taiwan and
China make most of it. In a totally different market, rugged, Panasonic does the same (and still
makes its own hardware). Another change is the proliferation of form factors. It used to be just
desktops and notebooks. Now, there is a plethora of device types. Arguably, each type
represents a block or sub-block of its own. A company with desktops, notebooks, and servers
can take business away from another that offers only desktops and notebooks. But as a class,
devices still occupy center stage.
Pipes was another category. Pipes still exist. In fact, they’re more important than ever. As we
head toward cloud computing, the presence of ubiquitous, high-speed, and reliable bandwidth
is assumed. And the number of different types of pipes has grown. Wireless barely existed a
decade ago and here we have BlueTooth, WiFi, and WiMax to add to cellular data and satellite.
Many new pipe purveyors have arrived on the scene as well. As firms experiment, bundling
broadband services with netbooks, shades of the “Nearly Free PC” movement circa 1998 echo
down the halls. Clearly, gotta have pipes, even more so now.
Distribution was considered important before, a necessary but profitless requirement, a way to
get your products to market. Internet sales coupled with firms specializing in logistics,
warehousing, and transport (e.g., FedEx) have created a whole new channel that didn’t exist 10
years ago. But retail is much the same, albeit with fewer competitors, and indirect distribution
remains largely intact, although the VAR end of the spectrum has suffered disproportionately.
Ok, so distribution: table stakes.
ISPs, on the other hand, have all but disappeared. Nobody needs in Internet Service Provider
anymore. A few diehard souls are hanging onto their AOL accounts and accessing the Internet
by modem, but this breed is headed for extinction rapido. However, there is something in its
place. People still need service providers, and arguably the whole cloud computing movement
is about providing computing as a service, either as raw cycles (e.g., Amazon’s EC3) or as
finished output (Google Earth). So, lets rename this category something original, say, Cloud.
And Cloud is more important than Internet access was.
Moving up the stack, we have Brand. Brand was seen as a way to gain higher margins without
increasing variable costs. For a fixed investment, a firm had an opportunity to establish a
desirability for its products without changing the products themselves. In theory, it could charge
a higher price for its brand (e.g., Sony), even if the underlying technology was the same as what
competitors had on offer. Brand is still important. In some cases, Brand is all that a company
has to distinguish itself. And in the case of Apple, Brand is arguably the most important
element in its mix.
How about Finance? Finance is a piece of plumbing. Many firms in the technology industry
have strong cash flows and balance sheets brimming with short-term assets, even in this
troubled economy. Cash is the grease that keeps the wheels moving, and OEMs are the ones
to make the big bets, quarter after quarter, on what is likely to sell. Only the silicon providers
have to make bigger, longer-term gambles. Finance feels to me more like table stakes than a
differentiating factor.
The Services block referred to services such as break-fix and installation, but also to higher-
order services like resource optimization and other management services. In the past decade,
IBM has turned management services into the sharp end of the stick, using its Global Services
division to lead sales for its hardware, software, and finance divisions. Hewlett-Packard has
also turned Services into a powerful competitive weapon. Services are more important than
ever as hardware has become more of a commodity.
Now we reach the touchy-feely layer. Portals were all the rage in 2000. Yahoo reigned
supreme in the early Internet. All roads to the Internet led through Portals, doors through which
traffic had to pass (and be monetized!) on its way to wherever. Portals continue to exist, and
Yahoo still has the single most expensive front page from an advertising perspective. But
Portals are a pale shadow of their former selves. Why? In a word, Search. Google established
the idea that doors were unnecessary. Rather than monetize one huge solid oaken entrance,
Google figured out how, with Search, to make a million pages each have their own small value,
and, added together, they came to overwhelm the value of the single Portal. So, Portal remains
a category with some value, not as much as before, and Search joins the fray.
Ah, Content. Always a cipher, never understood. AOL-Time Warner is a testament to what didn’
t work: content and distribution under one roof. Yahoo experimented with Content (e.g., Kevin
Sites reporting from dangerous places exclusively for Yahoo), and some of it stuck (although
not the Sites site). Craig’s List is almost pure content (it sure isn’t form!). And the Hollywood
studios continue to range around the edges of the computer business, trying to figure out a way
to get their piece of the digital age without losing their shirts. Content is ultimately what users
consume. So, it must still be important. But Content is no longer just what the studios make.
User-generated content (e.g., YouTube, instant messaging and other communications,
videoconferencing) takes up an increasing proportion of the digital airwaves. So, premium
content, as it’s now called, still commands respect, but it is gradually being swamped by a
rising tide of homebrew. Also, an important sub-category of Content, Software, is not to be
overlooked. Operating software, like Windows and OS X, could be grouped with Pipes, but
many applications and databases are best described as Content.
Finally, at the top (for no particular reason) was a category called, quaintly, Options. Luckily, I
put a picture there or else I might not remember what this was. Today, we would call it
Accessories or Peripherals. Back then, with the margins bleeding out of Devices, Options were
seen as a refuge. Options carried higher margins at the time, but this state was only transient.
The Peripherals biz has been nearly as brutal as mainstream hardware. There have been
some exceptions, however. Using Endpoint Technologies’ definition of an endpoint as a
single-user device with an IP address and a human interface and a peripheral as anything
hooked to the endpoint that does not access the Internet directly, then the iPod is a peripheral
that has achieved a singular success. But vendors such as Logitech — which sells speakers,
cameras, headphones, mice, and keyboards as well as other peripherals — are struggling just
like the device makers. So, Options morphs to Peripherals and loses importance.
Basic Principle Still Holds
Where does that leave us? With a new set of building blocks and a thesis that still has some
validity, albeit with footnotes on exceptions and subtleties. Here’s how I would make the same
chart today (Figure 2). I’ve elevated Brand to the top. The rationale is that Brand rises in
importance as an industry matures. Content and Cloud represent key ways for a firm to
distinguish itself. Portals, Pipes, and Services are still important, but they don’t offer much in
the way of competitive advantage; everyone has a Portal, everyone needs pipes and alliances
here may not be all that valuable, and Services span the spectrum from table stakes to primary
differentiator. At the bottom, Devices, Peripherals, Distribution, and Finance form the workaday
base of the pyramid.
Figure 2
This chart remains a work in progress. Surely, there are other ways to define the space, and
even whole areas I may have left out. To that end, I invite you, my readers, to send me
feedback on the nature of the blocks, their order, omissions, and any other input. Maybe
there should be a block for Collaboration?
© 2009 Endpoint Technologies Associates, Inc. All rights reserved.
even whole areas I may have left out. To that end, I invite you, my readers, to send me
feedback on the nature of the blocks, their order, omissions, and any other input. Maybe
there should be a block for Collaboration?
© 2009 Endpoint Technologies Associates, Inc. All rights reserved.