Skip to content

Help, someone stole my business model! Lessons from the failure of HMV

January 29, 2013

The epidemic of High Street retail failures continues with the iconic HMV, having traded for 91 years, and with 239 stores, now in administration. HMV reported healthy, rising profits as recently as 2009, but it is no surprise the company has failed, having spent the last few years attempting to compete with cheaper on-line rivals and the supermarkets.

HMV was the last major music retailer in the UK, having seen all of its rivals – Virgin Megastores, Zavvi, Our Price, Music Zone – over the last decade. The decline of UK music retail reflects trends around the world, with the US lacking a major national music retailer since the closure of the Virgin Megastore chain in 2009. However, recent years has seen HMV concentrate increasingly on DVD sales, video games, books, consumer electronics and even clothing rather than music.

HMV began in the 1890s at the dawn of the gramophone. In 1921 they opened their first dedicated shop in Oxford Street, London and composer Edward Elgar participated in the opening ceremonies. I started buying music from HMV in the early 1970s, and after 20 years of CD purchasing I now have a fairly eclectic and sizable CD collection. And, just like HMV, it is close to being obsolete.

While many recent corporate failures have been due in part to the economy, HMV’s demise is a failure of its business model as the Internet took hold. Amazon and iTunes are able to compete at a price, and with a level of convenience and buying options that cannot be matched by a business that occupies expensive buildings with high fixed costs.

HMV represented a significant proportion of its market – some 40% of the high street ‘physical’ CD music market and 30% of the DVD market – but in the digital era where 73% of music and films are downloaded or bought online, HMV’s business model has become increasingly irrelevant and unsustainable. It demonstrates the emergence of more efficient, more effective technologies and business models for distributing music than traditional in-store retailers.

Online shopping and deliveries have cheapened and speeded up the process of acquiring physical music, providing specialisation, depth, and lower prices, in a way that HMV never could. Consumers who don’t need physical copies of music don’t need to wait for deliveries – they download from iTunes, the market leader, or any other online digital retailer.

That’s only if you desire to own music at all, as consumers are turning away from that model too, realising that there is no need to own music in order to listen to it. Spotify has surged in popularity, hitting 20 million users in December 2012.  HMV may have sold a wide range CDs for £5 in their regular monthly or weekly sales, but Spotify can let you listen to an enormous chunk of the music made throughout history for £5 a month. Against this business model, HMV can no longer effectively provide the services required of it.

HMV is the latest victim of “showrooming”, the practice of using a shop to browse and research, but buying from a cheaper online store later. With 20% of shoppers saying it was something they had done, and nearly half of those ending up buying elsewhere, nearly 10% of sales are walking out of the door as a direct result of ‘showrooming’ activities.

HMV looks like a prime victim, as almost their entire product line is easily found at lower prices via online retailers, and with reliable and often free next day delivery, there are no compelling reasons to pay more just to own it today – unless the digital download format is your preference where the purchasing experience is personal, instant and convenient.

By failing to invest in ecommerce, you could say HMV lost their customer twice – once when the customer decided they would switch their purchase behaviour from High Street to online, and again when that customer made a decision on which online retailer to buy from.

So could they have done anything differently? HMV had an inherent advantage with their links with the music industry and distributors. They could have built a unique online experience, offering a level of rich and exclusive content for music fans, which would have been unmatched by rivals. They could have been an early player in the download space, another behaviour change that they failed to read and react to.

The fundamental flaw in HMV’s business model is that they failed to understand and respond to changes in consumer shopping behaviour and the channels offered by newer, more agile rivals.  Only by investing in gaining a deep and insightful understanding of the shopping behaviours and preferences of your customers, can you design shopping experiences that keep them in your audience, physically or virtually.

It failed to adapt to what is an inherently digital business model. The online, digital and rental products and services pioneered by Apple, Amazon, Love-Film and Netflix slashed resource and distribution costs, developing delivery mechanisms for music that created a new market of downloading to devices – the convergence of the products and the business model, a new concept in the competitive landscape.

So how can we learn abut the demise of HMV’s business model, and look to our own business? A business model describes how an organisation creates, delivers and captures value for its customers. In their book Business Model Generation, Alex Osterwalder and Yves Pigneur suggest a Business Model has nine building blocks:

  • Customer Segments: for whom are we creating value, who are our most important customers?
  • Value Propositions: what value do we deliver to the customer, which one of our customer’s problems are we solving, which needs are we satisfying?
  • Channels: through which channels do our customers want to be reached? Which are the most cost-efficient and work the best?
  • Customer Relationships: what type of relationship does each customer segment expect us to establish and maintain with them?
  • Revenue Streams: what value are our customers really willing to pay? For what do they pay? What are our different revenue streams?
  • Key Resources: what key resources do our value propositions require?
  • Key Activities: what key activities do our value propositions require?
  • Key Partners: who are our key partners, which key resources or activities do they perform?
  • Cost Structure: what are the most important costs inherent in our business model to our key resources and activities?

Alex Osterwalder (http://alexosterwalder.com/) developed this approach into the concept of the Business Model Canvas, follow this link: http://www.businessmodelalchemist.com/

Osterwalder’s premise is that companies that aren’t able to systematically rejuvenate their business model as industry boundaries change will struggle. Business model innovation is about new ways of creating, delivering and capturing value. It’s clear to see it’s a useful business strategy tool, to both analyse HMV, the new digital players, and indeed your own business – for example, ask yourself these four questions to construct your own business model canvas:

Why should customers be excited to do business with you? This is the value proposition. You could almost go as far as asking: Why should customers love to do business with you?

How do you create excitement for your customers in a productive way? This is the value architecture or operating model. Here you describe how you fulfil your value proposition.

How do you earn money? This is your revenue model or the profit formula and here you should be able to explain why you can earn revenue.

What are your values you live with your customers? That is the human side of the business and of utmost importance since it is the most difficult part for rivals to copy. The culture and values of a business are unique.

For each of these questions, you need compelling answers, but do not get lost in the detail, look at the broader picture and see the interdependencies.  If you can answer the questions you have a great strategy that is customer-oriented, profitable and sustainable.

HMV shows that a business has to be fast and flexible in meeting its customers’ needs, including how the customer chooses to interact with you, and the format of product offering. A great example of a traditional company that has adapted to the times is Auto Trader, the car sales magazine that has moved online and has still retained its market leading position, demonstrating its ability to meet its customers’ demand for online search.

The general consensus is that HMV failed because it was wedded to its old business model and the sheer problems of scale. Even a giant the size of HMV cannot hold back the tide of changing consumer preference – and it is therefore vital that you listen to your customers and incorporate their wishes into the very heart of your business model.

The new format of the music product, new purchasing channels and new means of consuming meant that the focus was on the product and may have taken away the focus on the user – something which has been distinctive in Apple’s growth. The disruption to the cost model was also missed from HMV’s business model. A parallel here is newspapers, who regard the enemy to their business model as ‘the internet stealing our content’ – when in fact they should be more troubled by the changing demographics of a society that simply wants to pay less for news than it once did, and is now used to 24/7 free access. At the same time, we all need a bank account but don’t necessarily need a branch, which is why on-line banking has disrupted the banking market and become so successful.

A business model describes how an organisation creates, delivers and captures value for its customers, look at the lessons to be learned from the demise of HMV and other retail trends:

  • Give the customer more control – make is personal. A study by CISCO showed 75% of shoppers want a personalised experience – but only if they authorise it. HMV could not create this in their business model
  • Create richer experiences – online means not having to queue in long checkout lines, and the iTunes model of listening to tracks for free and then purchasing only selected items is awesome – again HMV could not compete
  • Enable self-service – Adidas has an inventory problem, it has 450 different trainer shows to sell, but retailers only stock 10-30 in each store. With the help of Intel’s Virtual Footwear Wall – one of the leading products in the emerging ‘endless aisle’ category – walk-in customers can now see the full range.

All business success rests on something labelled a sale, which at least momentarily weds company and customer. As Peter Drucker said, a business exists to create a customer, so make sure your business model is customer centric.

Advertisements
No comments yet

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: