Market confusion – what’s in a word?

Business strategists and marketers throw the word “market” around liberally, using it in different contexts with different definitions without explanation. This can be confusing.

I especially notice the difference moving from an investment perspective to an operational perspective. In the former, the term is often more seller-focused. For example, “who are the players in the market?” In the latter, the term is often more buyer-focused. For example, “our market is automotive companies.”

“The market is $30 billion.” (Overall bazaar, refers to the amount buyers are spending with sellers.)

“We sell to the higher education market.” (Refers to a group of buyers.)

“We can beat anyone in the market when it comes to color choice.” (Refers to a group of sellers.)

“Let’s take this RFP to the market.” (Sellers)

“The market won’t respond well to that message.” (Buyers)

Like I said, this can get confusing, especially if you’re trying to discuss something with precision, like a model for positioning.

For the sake of clarity, here are some definitions.

Market: The overall bazaar, including sellers of a product type and buyers of a product type. Buyers have some (but not all) overlapping problems to be solved (needs), and sellers have solutions with some (but not all) overlapping capabilities. The definition is typically somewhat loose, and different parties may not agree on the specifics. Analyst groups derive a lot of value from time defining and sizing markets.

Market segment: A group of buyers of the product type, filtered by one or more criteria. Needs are very overlapping.

Target market: A market segment the seller has chosen to target.

Product category: Aka Product Type. A group of products that solves a common set of problems. A product category can be broadly defined or narrowly defined (e.g, network security products or firewall products, respectively). Which is used is dependent on the context.

Competitive arena: The vendors competing to sell to a particular buyer. Over time, a company will find itself in the same competitive arena repeatedly, competing with the same sellers to meet similar buyer needs. This is likely a subset of all sellers, with many overlapping capabilities. In aggregate, this is typically a product category.

An important characteristic of these concepts is their semi-organic nature. A market needs both buyers and sellers, and the components are defined by what sellers are offering and what buyers are looking for, and these influence each other. Existing buyer needs (i.e., needs buyers are aware of) are the biggest factor in determining markets, but sellers can introduce new needs and influence the perception and priority of existing needs.

Sellers need to tread a delicate balance: get too far away from what buyers are already looking for and you risk “getting ahead of the market” and failing. Only follow what buyers are already asking for and you risk becoming a me-too product, competing only on price.

Threading this needle correctly is the goal of product strategy and positioning, which I’ll explore in a future post.

Lightbulbs and patent trolls

I’m always searching for good analogies that highlight what’s wrong with software patents. I don’t remember where I saw this, but I like it.

We all know the story of how Thomas Edison invented the lightbulb. He knew the basics of what he needed to invent: something that would glow consistently when a current was applied to it, but wouldn’t burn up too quickly. The idea for this had been around for fifty years, but no one had been able to make it work practically. He and his assistants tried some 3,000 different ways of making it work, and finally figured out how. And thus the modern lightbulb was born, with Edison as its inventor.

Flash forward to modern software patents. Edison isn’t the inventor, and doesn’t receive the patent or any accolades. Instead, some guy fifty years earlier has the idea for an incandescent lightbulb and describes it without having any practical way of making it work, and just sits back and waits for Edison to come make it a reality. Welcome to the modern patent troll.

Traditional patents are granted for the method by which an invention accomplishes something – the specific filament, for example, or a machine that works in a particular way to do something. Software patents are granted for the concept that the software accomplishes, not the actual code that accomplishes is (that code is still protected by trademark). Amazon’s (in)famous one-click patent doesn’t cover the actual code written to make one-click happen (there are many ways one could write that code), but covers the idea of writing code to make that happen.

If we applied modern patent practices a hundred years ago, Eli Whitney wouldn’t have patented his actual cotton gin, but the idea of using a machine to separate cotton fibers from seeds, regardless of how the machine was designed or built. Edison wouldn’t have had to spend time figuring out how to build a working lightbulb, or patenting the specific method – the vague idea would have been enough.

Edison famously said that invention was 1% inspiration and 99% perspiration. Today’s software (and many hardware) patents are awarded for inspiration, not perspiration.

Kickstart, crowdfunding, and the future of media

If you’ve known me for long enough, we’ve probably had a conversation or two about the future of the music and movie industries. These industries are undergoing massive changes right now, largely driven by changes in technology over the last decade that are rendering existing business models obsolete.

Media industry supporters go crazy over the Internet and piracy, support things like SOPA, and bemoan the “death of music” or the “death of writing” or whatever it is they are involved in, claiming that without robust legal protections against piracy, music, writing, and movies will go away. I don’t buy this argument because these various industries have only existed for 50-100 years, and people have been creating music and writing for far longer (obviously movies are a modern phenomenon, but the point remains).

To explain further, let’s focus on the recording industry. Although they claim they are all about creating music, their business model is actually built on the distribution of music, not its creation. Music itself has been around since the dawn of humanity – the oldest known instrument is the Divje Babe flute, from some 40,000 years ago. Modern recording companies, however, have only been around since the early 21st century. The invention of phonograph in the late 19th century allowed music to be recorded and distributed for the first time in history, and by the 1920’s the technology had been perfected and modern recording companies were born.

Eventually, the record was displaced by the 8-track tape, then by the compact cassette, then by compact discs, but for each of these, the recording industry’s business model has been about the production and distribution of these physical goods. In other words, the recording industry is actually not a creative industry, but a manufacturing industry. It’s not selling music; it’s selling physical tapes, records, or cds.

And this was very valuable: cost effectively manufacturing cds requires a significant capital investment, and getting them physically shipped all over the world requires a lot of logistical expertise and money. Because their manufacturing and distribution expertise was so valuable, the recording industry made a lot of money and was able to align related industries to support it: radio was a key marketing and advertising channel, driving additional sales, as were live concerts.

Record companies like to claim that their business model is really centered around finding new artists to publish, but the only reason for narrow talent acquisition is because of manufacturing cost and scale issues. Sure, a recording session in a studio can be somewhat expensive, but it’s nothing relative to the cost of ramping up manufacturing and distribution of physical media. So their business model required fewer artists to sell more records. Thus the hunt for talent.

Advances in technology and the introduction of the Internet have rendered the two strengths of the music industry worthless. Now that all music is digitally formated, manufacturing expertise is no longer needed, and since the Internet allows digital files to be distributed world-wide at near-zero cost right into consumers’ homes, distribution expertise is no longer needed.

In short, there is no fundamental reason for record companies.

But, they do provide a valuable service. Even if the cost of recording (studio time) is small relative to the cost of manufacturing and distribution, it’s still large relative to most starving artists’ bank accounts. And that’s where Kickstarter and crowdsourcing come in.

This last weekend, two independent artists – a video game creator and a music artist – both posted projects to get community funding for their work. They both raised around $1,000,000 in 24 hours – directly from fans, completely bypassing publishers, and ultimately at a far lower cost than the recording industry model would support.

The recording industry has been buffeted by the winds of change for a decade, but continues to cling to its old business model. That model’s not going to survive another decade. Some of the companies will, but not in their current form.