I recently tweeted about the acquisition of HauteLook by Nordstrom. I think this is one example of many we will see in the coming years of large scale, “offline” incumbents buying their way into the future.
I believe every business today is going to be rewritten for the web, or “Internet optimized” as I call it. This is not about putting up a website or selling online. This is much more fundamental. The Internet affects literally every part of a business system and makes it much more cost efficient than their legacy comparable. Let’s take a few examples:
- Marketing – Paid, organic, display, affiliate and other channels are far more precise and cost effective to pin point your audiences than any blunt mass-market tool of the past. You are connected to all your customers, it’s just a matter of finding them (and vice versa).
- Product – In an Internet optimized business, the product is instrumented to see real metrics on how people are logging into your application, which functions people are accessing, what breaks and doesn’t, etc. Each of those tell you in real time what features to focus on or not, develop or discard, etc. Customers participate in the product development process.
- Development – Multi-tenancy, single instancing, and SaaS makes development easier and faster than the complex install matrix of the past. Cloud services like AWS, Rackspace, Engine Yard and others are fully variable infrastructure available to build upon. AGILE and other development methodologies create output on regular basis.
Any “new” company is doing things efficiently across virtually all departments from the ground up (and includes areas not mentioned like sales, hiring, finance, and more). At scale, they will have a fundamentally better cost model than any legacy player possibly could. The legacy company still has those very expensive relationship based sales reps, or the high touch TV-driven ad model, or the “divine from above”/ “decide by committees” product model. These are all points of friction that makes them hard to change, slow to adopt new business models, and not innovative. It also leaves them at a fundamental economic disadvantage.
If you think about it, this concept is true for almost all businesses. We see retail in the Nordstrom/Hautelook example. The same is true in traditional advertising versus ad networks; console based gaming versus virtual goods businesses; large media publishers versus blog aggregators/publishing platforms; stock fit retail brands versus custom manufacturers; etc. The Web is as deflationary across the internals of a business as anything else! This wholesale rewiring is happening now, creating a unique moment in time and a littany of new companies looking to lead the pack.
The most likely way for offline players to evolve is to buy these Internet optimized businesses, incent those organizations to grow as rapidly as they can, retain the talent for as long as it possibly can, in the hopes they can eventually re-make their overall business by being led by example. Those that do nothing will not survive, and there will be many; those that think aggressively have a shot, and I think we’ll see much more of these partnerships with traditional brands and Internet optimized companies going forward.
[Update 4/08 - Random House leads round of financing at Flat World Knowledge]
[Update: 4/25 - The Travel Channel announces $7.5MM investment in Oyster.com]