“The second chapter of e business will be a wiser one. And it will begin with ques-tions. What’s the business model for profitability? …”
Consultancy advert by IBM, early 2001
Sometime in the later 1990s, the term “business model” passed into general usage in management speak and the business press; as the quotation above suggests, the term survives in a changed world at the beginning of the 2000s as a way of flagging the new priorities of management after the tech stock crash as well as the new opportunities for consultancy. In this section, we argue the case for developing the term into a more vertebrate concept that is strongly associated with cost recovery and resolution.
This strengthened concept is then used to understand the new economy in its first phase from 1995-2000 as well as subsequent developments. Our critical approach re-jects the direct strategy of frontally attacking key assumptions and illustrations in the literatures; and instead prefers the indirect strategy of correction by developing an alternative analysis that rectifies absences and deficiencies in the literatures.
Frontal attack is immediately attractive when the visionary and consultancy litera-tures recycle the same few dubious illustrations and assumptions. One example would be their reliance on a few illustrative cases, especially Hollywood as metaphor for what replaces vertically integrated companies and Silicon Valley as prototype of a new business ecosystem. Another would be the often-repeated claim that intellectual capital is becoming more important in a world where knowledge is now the basis of value. Such assertions, identifications and claims manifestly do not rest on conceptual precision or careful empirical research and they are increasingly problematised or refuted by events since Spring 2000. As for Hollywood or Silicon Valley, these exist in the literatures as new myths for our time which replace the old myths about Ford and Japan whose empirical relation to anything like Highland Park was always fairly tenuous (Williams et al., 1992). Or again, conceptually, it was always logically falla-cious to suppose that the increasing ratio of market to book values implied something about the growth of intellectual capital; even before the crash in tech stocks drama-tised that point for non-accountants.
While nonsense of this kind should and could be criticised, the problem with the di-rect critical approach is that it can knock down the increasingly shaky and always half baked orthodoxies of the late 1990s without clarifying what the new economy was, is, or might be. This negative outcome is a real possibility because that was what did happen in the case of Japan, which had the same emblematic significance in early 1990s discussion of competition as the new economy had in the late 1990s. Direct attacks on lean production (Womack et al., 1990) and faltering economic perform-ance after the end of the Hesei boom, discredited Japan as the new model and social scientists moved on to discuss other issues without being any wiser about what Japan
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-had represented or clearer about the basis of manufacturing competition. For this reason, while not completely renouncing direct attack, in this article we prefer an indirect approach of revisionism by alternative analysis that corrects the absences and deficiencies identified in our reading of the literatures of the new economy.
From this reading, and our own a priori as social accountants, we can develop three heuristic principles to guide alternative analysis:
(i) Understand the contradictions of new economy processes
The visionaries and consultants make strong assumptions about unitary, non-contradictory processes. An alternative analysis could renounce such assumptions by focusing on the old as well as the new economy without assuming that the old and new are subject to the same superordinate imperatives and without assuming that all the old (or new) manifests one essential identity. An alternative analysis should also reverse the tendency to focus on one level, as when visionaries and consultants con-centrate on the micro level, or mainstream economics focus on meso and macro.
(ii) Understand the mediating/regulating role of the capital market
The capital market appears unsystematically or uncritically in the existing literatures:
in the gonzo literature, venture capitalists queue up to give away our money to Sili-con Valley entrepreneurs; while, in the Sili-consultancy literature the excesses of late 1990s IPO and venture capital are represented as a new business ecosystem which boosts innovation. An alternative analysis should provide a broader or systematic discussion of how the capital market mediates between savers and firms and how that market regulates the behaviour of old and new companies by what it gives and wants in return.
(iii) Emphasise cost recovery
Visionaries, consultants and business school literatures share a language about man-agement “creating value” as part of their metaphysic. Against this, an alternative analysis should emphasise the task of management is to recover costs (including whatever surplus is required by the capital market). Of course, companies and sectors recover costs by adding value. But the change of language is nevertheless valuable because cost recovery emphasises management’s dependence on precarious and chang-ing structural conditions.
If the heuristic principles identify a direction, an alternative analysis can only be de-livered with the help of a concept that is up to the job. Our tactic here is to take the existing loose term “business model” and develop it into a more precise concept. In the business press or company SEC filings, the term business model is often used im-precisely in as little more than an elastic synonym for strategy. The best guide to cur-rent usage is provided by Michael Lewis who celebrates business model as a low defi-nition term:
“Business Model is one of those terms of art that were central to the Internet boom: it glorified all manner of half baked plans. All it really meant was how you planned to make money. The ‘business model’ for Microsoft was to sell software for 120 bucks a pop that cost 50c to manufacture. The ‘business model’ for Heal-theon was to add a few pennies to every bill or order or request that emanated from a doctor’s office. The ‘business model’ for Netscape was a work in progress;
no one ever did figure out how to make money from Netscape; in its brief life Netscape had lost money. The ‘business model’ of most internet companies was to attract huge crowds of people to a web site, and then sell others the chance to ad-vertise products to crowds. It was still not clear that the model made any sense”
(Lewis, 1999, p. 274).
In our view, this loose term can be developed into a more precise concept by building on the term’s existing associations with cost recovery and resolution:
(i) The association with cost recovery:
In current usage, the term business model denotes a firm level plan for cost recovery that can be explained to a journalist or venture capitalist or shareholder. That much is clear from answers to the question about when is it not a business model? It is not a business model by choice where cost recovery is not an object, as in the case of Nap-ster, which was promoting free downloads of music before it struck its deal with Bertelsmann. Equally, it is not a business model when cost recovery fails so dramati-cally that the management is replaced or the firm goes out of business as in the case of boo.com or a dozen other B2C companies which ran out of money in 2000.
(ii) The association with resolution and closure:
In current usage, the term business model has strong associations with resolution and closure, which practically implies a prospect of sustained cost recovery for a period of 3-5 years (though the basis for cost recovery may change within that time). Again, examples can be used to illustrate the point. The British internet service provider, Freeserve had a business model of no fee for subscribers with costs recovered from the local call charges that they paid. When this model collapsed after 18 months Freeserve was embarrassed because it had no alternative sources of revenue. Compare and contrast the much larger US firm AOL, which has covered falling subscription revenues by generating revenue from advertising and software development.
The implication is that a more precise concept of business model can be developed by explicit consideration of whether and how the business model envisages cost recovery from product and/or capital market. Just as a more precise concept of business model should include more explicit consideration of whether and how business models can achieve resolution at firm or sector levels. Bearing these considerations in mind, we will in the next two sections of this article examine what business model means.