Business Model Trends – The Good, The Bad, and The Ugly

by Steve O'Keefe on March 22, 2011

Two days before an earthquake measuring 9.0 on the Richter scale struck Japan, resulting in a devastating tsunami and near meltdown at the Fukushima nuclear power plant, we wrote on this blog about “the growing interest in nuclear power” as an alternative to coal fired power plants.

Oops!

While nuclear power-generating facilities have been greatly improved since the Fukushima reactors were built — and the prospects for nuclear energy in the future are still bright — the timing is bad. The prospects for nuclear energy in the short term have dimmed as the costs associated with using that technology are being recalculated.

That wasn’t the only thing wrong with my blog post. A reader called my attention to the case against venture capitalist Nathan Myhrvold’s company, Intellectual Ventures. Myhrvold is the former chief technology officer of Microsoft whose new company invests in technology rather than investing in companies. Intellectual Ventures buys the rights to patents it likes, then markets those patents to other firms. Or does it?

According to Mike Masnick, the prolific and outspoken editor of TechDirt, Myhrvold’s venture is not based on marketing patents but on “shaking down” companies by suing anyone using its patents without permission. Masnick accuses Intellectual Ventures of disguising its true business model by using shell companies to file the lawsuits:

[Intellectual Ventures] had decided to protect its brand name by getting other companies or creating those companies itself, giving the patent to those other companies that no one had ever heard of, and having them sue.

Ouch!

While we did praise Myhrvold’s business plan on this blog, his method for picking technologies to invest in was our focus, not his manner of collecting on those investments. However, without beating up on ourselves too much, we should point out that another company with a strikingly similar business plan has been the recipient of tremendous admiration in the media these past few weeks.

I’m speaking of ARM, the technology company behind the low-heat computer chips used in Apple’s iPhone and iPad, along with many other smartphones and tablets. The company is not bashful about its creative structure:

ARM has an innovative business model. Instead of bearing the costs associated with manufacturing, we license our technology to a network of partners, mainly leading semiconductor manufacturers and OEMs. These partners utilise our designs to create smart, low energy chips suitable for modern electronic devices.

This structure — licensing technology rather than manufacturing it — has led to a gross margin for ARM of 94%. With revenue of $631 million in 2010, ARM had a profit of $593 million. You have to envy that ratio, no matter what business you’re in.

ARM’s business model is similar to Intellectual Venture’s stated mission, yet while Myhrvold is the recipient of scorn from TechDirt and others, ARM is getting nothing but love these days. Renown technology strategist, Michael J. Fern, gushes over ARM’s business model, saying it confers “three significant advantages over Intel.”

The Wall Street Journal joined the praise parade, with University of Chicago-trained economist and new “Heard on the Street” columnist, Rolfe Winkler, noting “ARM… doesn’t have to deal with manufacturing costs or the risks of holding inventory. It’s a deeply profitable business.”

The best take on ARM’s business model, from a Minitrends perspective, comes from the recent article by Om Malik at the influential blog, GigaOM. In a post critical of Twitter’s business model, the highly-respected tech journalist compares and contrasts the business models of half-a-dozen tech companies, including Xerox, Apple, Google, and ARM. Relying heavily on the work of business guru Alex Osterwalder, Malik concludes that “the business model innovation is what turns great products into fearsome companies.”

Sometimes, the most beautiful business models can turn ugly down the road. I was teaching a workshop once when a perplexed attendee kept interrupting with questions. “How do you generate sales,” he asked. “I don’t have sales,” I answered, “I only have expenses. All I have to do is cover my expenses.”

I was describing the workings of a technology startup that made videos of businesses without charging those businesses. Costs were recouped by finding sponsors to cover the expenses. The fellow in the back of the room couldn’t understand the business model and, as it turns out, neither could investors or sponsors. An early online video play, the company died in 2008 for lack of revenue.

The clever idea of yesterday can seem brilliant or stupid a few years — or even a few days — later. That’s why, for your own Minitrends Adventure, we recommend spending as much time thinking about the business model as you do about the services or goods being sold.

STEVE O’KEEFE
News Editor, Minitrends Blog

Source: “Nathan Myhrvold on Uncovering and Investing in Technology Trends,” Mintrends Blog, March 9, 2011
Source: “Nathan Myhrvold’s Intellectual Ventures Using Over 1,000 Shell Companies To Hide Patent Shakedown,” TechDirt, Feb. 17, 2010
Source: “ARM Disrupting Intel with its Business Model?,” FernStrategy, March 10, 2011
Source: “Getting an ARM Up on Intel,” The Wall Street Journal, March 17, 2011
Source: “What Is Twitter’s Problem? No, It’s Not the Product,” GigaOM, March 8, 2011
Photo courtesy of Steve Jurvetson, used under its Creative Commons license.

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