Chapter 11

Digitalisation

Digitising physical products

The pattern

The Digitalisation business model consists of transforming an existing product or service into a digital variant. The model can be applied by a large number of business types: for example, print magazines offering online versions, and video rental stores providing online streaming services. More than most, the Digitalisation business pattern embodies the principal technological, social and economic developments of recent decades. Automation makes virtual offerings increasingly available, highly reliable, very flexible and ever-more efficient, so that the Internet has had a paramount influence on business models. Ideally, the Digitalisation of a product or service is realised without changing the value proposition to the customer in a negative way.

Digitalisation not only allows an existing business to be ‘reproduced’ online, and some of the business processes and functions relocated to the Internet (HOW?), but can also lead to the creation of entirely new offerings. Contents that could not have been produced in their present form before the advent of the Internet, are now offered to customers with a moderate amount of effort (WHAT?). Digitalisation also affects the revenue logic, as the digital infrastructure allows new value-capturing mechanisms (VALUE?), let them be obvious (e.g. alternative payment methods) or non-obvious ones (e.g. advertisements). Faster-paced upscaling and easier access to new customer groups (WHO?) are also side-effects of this transformational pattern.

Goods that were traditionally sold in physical form are increasingly being supplemented or even replaced by immaterial representations and display several advantageous characteristics. In today’s world we can buy music online – anywhere, anytime. But this development also has a dark side, bringing into play issues of copyright and digital rights management, not to mention pirating. Considerable time and effort need to be directed towards protecting the owners’ intellectual property rights and rethinking the revenue logic of the business model as a whole.

Contents that are already available electronically can also be enhanced by Digitalisation. Consumer electronics have been immeasurably impacted by the addition of interactive communication: customers are able to watch television at any hour when they use video-on-demand, and even cast votes or comment on a television feature in real time.

Digitalisation has close connections with other business models: Crowdfunding (#8) or Leveraging Customer Data (#25) would never have become such financially sound propositions without it.

The origins

Being heavily reliant on modern computers and communication technologies, the Digitalisation business pattern is still a relatively recent phenomenon. It resulted from the drive to automate standardised and repetitive business processes within enterprises. The concept has been gradually applied to satisfy customer needs in the same way. At first, Digitalisation served to create digital products and services in domains represented by numbers and logical connections. It thus comes as no surprise that the first electronic services were created by banks in the early 1980s. Initially, these services made use of terminal interfaces and data transfer via telephone lines. The advent of broadband Internet in the 1990s permitted more rapid Digitalisation on a wider scale directed towards the individual consumer. With the development of graphic user interfaces, browsers and encryption, a huge array of Web services became available.

The innovators

Since the 1990s, many businesses have started to distribute their products and services online. Licensed to Chapel Hill in North Carolina, WXYC is an American college radio station broadcasting 24/7, 365 days a year. Besides music, the station broadcasts many other programmes including talk shows, content specific to North Carolina, student-related features and sports. WXYC was one of the first stations to realise the potential of Digitalisation, venturing to broadcast its programmes not only on FM but also over the Internet, thus broadening its popularity among wider audiences in locations far beyond North Carolina, including the American Northeast and Great Britain.

Hotmail, now operated by Microsoft and included in its Outlook.com offering, was one of the first webmail service providers to use the Digitalisation business model to provide electronic mail rather than conventional letters. The basic Hotmail service, including a modest email storage capacity, is offered free of charge, while customers must pay if they wish to benefit from premium features such as increased storage capacity or freedom from intrusive ads (see Freemium, #18). Address books are set up online and emails can be composed, stored and sent within the user interface. The cost to Microsoft of offering a free basic mail account is negligible when cross-financed by revenue received from premium users.

Amazon Kindle is another example of Digitalisation. Building on the sector-changing trend of digitalised reading content, Amazon Kindle devices enable users to browse, buy, download and read e-books, newspapers and magazines via wireless connection to the Kindle Store. Now offering the tenth generation of devices, with different product lines including Kindle Paperwhite or Kindle Oasis, making books digital, Amazon is the global leader in e-book readers with a market share of more than 50 per cent in 2015. Enabling a hand on the purchasing channel of the Kindle customers regarding the content, which comes close to the Razor-and-Blade business model pattern, Amazon Kindle was one of the main drivers to speed up the use of e-books.

Digitalisation: digitalisation of the book industry

When and how to apply Digitalisation

Digitalisation can be applied to all sorts of data and knowledge-driven products. Especially for time-critical offerings (e.g. news), there’s no alternative than to digitalise them and simultaneously use the Internet infrastructure to maximise the value proposition. Currently, the border between physical and digital melts down, which gives further potential for totally different value propositions. New technologies such as 3D printers enable the digitalisation of former solely physical products. In all Digitalisation efforts, it is important to keep in mind the power of complementary offerings and other partner organisations positioned in a firm’s ecosystem to address the fast-paced change regarding digitally-enabled value propositions.