Intangible Creator(Inventor) sells intangible assets such as patents. An example is Lucent's Bell Labs(see patentsales lucentssg. com). Firms that license the use of their intangible assets while retaining ownership are not classified as Inventors; they are Intangible Landlords(see below) Human Creator and Human Distributor create and sell human assets. Since selling humans- whether they were created naturally or artificially or obtained by capture-is illegal and morally repugnant in most places today, these models are included here for logical completeness and secondarily, as a historical footnote that they have been used in the past Financial Landlord includes banks and insurers. The former provides cash that their customers can use for a limited time in return for a fee(i.e, "interest). The latter provides their customers financial reserves that the customers can use only if they experience losses, for a fee(i.e Intangible Landlord licenses or otherwise gets paid for limited use of intangible assets. There are three major subtypes:(1)an attractor attracts peoples attention using, for example, television programs or web content and then"sells" that attention (an intangible asset) to advertisers; the attractor may devote significant effort to creating or distributing the assets that attract attention, but the source of revenue is from the advertisers who pay to deliver a message to the audience that is attracted-e. g: New York Times, (b)a publisher provides limited use of information assets such as software,newspapers,or databases in return for a purchase price or other fee(often called a subscription or license fee)-e g Microsoft; many publishers also receive revenues from advertising that is bundled with the information assets, but we classify such revenues as part of the previous attractor business model, (c)a brand manager gets paid for the use of a trademark or other elements of a brand; this includes franchise fees for restaurant or hotel chains-e g Wendys Physical and Human Landlords. In most cases, Human Landlords( Contractors)also require physical assets(such as tools and workspace), and Physical Landlords also provide human services( such as cleaning hotel rooms and staffing amusement parks) associated with their physical assets. In cases where substantial amounts of both human and physical assets are used to provide a service, we
9 • Intangible Creator (Inventor) sells intangible assets such as patents. An example is Lucent’s Bell Labs (see patentsales.lucentssg.com). Firms that license the use of their intangible assets while retaining ownership are not classified as Inventors; they are Intangible Landlords (see below). • Human Creator and Human Distributor create and sell human assets. Since selling humans— whether they were created naturally or artificially or obtained by capture—is illegal and morally repugnant in most places today, these models are included here for logical completeness and secondarily, as a historical footnote that they have been used in the past. • Financial Landlord includes banks and insurers. The former provides cash that their customers can use for a limited time in return for a fee (i.e., “interest”). The latter provides their customers financial reserves that the customers can use only if they experience losses, for a fee (i.e., “premium”). • Intangible Landlord licenses or otherwise gets paid for limited use of intangible assets. There are three major subtypes: (1) an attractor attracts people’s attention using, for example, television programs or web content and then “sells” that attention (an intangible asset) to advertisers; the attractor may devote significant effort to creating or distributing the assets that attract attention, but the source of revenue is from the advertisers who pay to deliver a message to the audience that is attracted––e.g.: New York Times, (b) a publisher provides limited use of information assets such as software, newspapers, or databases in return for a purchase price or other fee (often called a subscription or license fee)––e.g.: Microsoft; many publishers also receive revenues from advertising that is bundled with the information assets, but we classify such revenues as part of the previous attractor business model, (c) a brand manager gets paid for the use of a trademark or other elements of a brand; this includes franchise fees for restaurant or hotel chains––e.g.: Wendy’s. • Physical and Human Landlords. In most cases, Human Landlords (Contractors) also require physical assets (such as tools and workspace), and Physical Landlords also provide human services (such as cleaning hotel rooms and staffing amusement parks) associated with their physical assets. In cases where substantial amounts of both human and physical assets are used to provide a service, we
classify a firms business model(as Human Landlord or Physical Landlord) on the basis of which kind of asset isessential to the nature of the service being provided. For example, a passenger airline would generally be considered a Physical Landlord--even though it provides significant human services along with its airplanes-because the essence of the service provided is to transport passengers from one place to another by airplane. Conversely, a package delivery service (like Federal Express) would be classified as a Human Landlord because the essence of the service provided is to have packages picked up and delivered (usually by people) regardless of the physical transportation mode used(bicycle, truck, train, etc. As the subtypes of Financial Landlord and Intangible Landlord listed above illustrate, it is certainly possible to subdivide these 16 business models even further. For now, however, we have found that this level of granularity provides a useful level of analysis 3. 4. Performance Implications Our null hypothesis in this paper is that business models can explain performance heterogeneity perhaps as much as the traditional factors such as year, industry, and firm effects. This hypothesis is motivated by a number of antecedent theories. We review these by asset rights Start with the Creator and Distributor models, where the emphasis is on selling asset rights. We note that the property rights literature suggests that with incomplete contracting, the firm that has the most competitive advantage in using an asset will pay the highest price to own it. This is also related to the point made in transaction cost economics. (Williamson, 1971) posits that transactions that are costly asset-specific, uncertain, or are exchange-frequent-are more likely to be internalized within organizations, through a process of fundamental transformation that can reduce opportunism. More recently, (Williamson, 2002)expands this transformation to not only within but also between organizations, through contracting. For example, intangible products tend to be more asset-specific(see (Teece, 1980) for technological assets, (Teece et al., 1997) for reputational assets), so we might observe that such asset types are more likely to bought and sold outright rather than be borrowed and lent
10 classify a firm’s business model (as Human Landlord or Physical Landlord) on the basis of which kind of asset is “essential” to the nature of the service being provided. For example, a passenger airline would generally be considered a Physical Landlord—even though it provides significant human services along with its airplanes—because the essence of the service provided is to transport passengers from one place to another by airplane. Conversely, a package delivery service (like Federal Express) would be classified as a Human Landlord because the essence of the service provided is to have packages picked up and delivered (usually by people) regardless of the physical transportation mode used (bicycle, truck, train, etc.). As the subtypes of Financial Landlord and Intangible Landlord listed above illustrate, it is certainly possible to subdivide these 16 business models even further. For now, however, we have found that this level of granularity provides a useful level of analysis. 3.4. Performance Implications Our null hypothesis in this paper is that business models can explain performance heterogeneity, perhaps as much as the traditional factors such as year, industry, and firm effects. This hypothesis is motivated by a number of antecedent theories. We review these by asset rights. Start with the Creator and Distributor models, where the emphasis is on selling asset rights. We note that the property rights literature suggests that with incomplete contracting, the firm that has the most competitive advantage in using an asset will pay the highest price to own it. This is also related to the point made in transaction cost economics. (Williamson, 1971) posits that transactions that are costly–– asset-specific, uncertain, or are exchange-frequent––are more likely to be internalized within organizations, through a process of “fundamental transformation” that can reduce “opportunism.” More recently, (Williamson, 2002) expands this transformation to not only within but also between organizations, through contracting. For example, intangible products tend to be more asset-specific (see (Teece, 1980) for technological assets, (Teece et al., 1997) for reputational assets), so we might observe that such asset types are more likely to bought and sold outright rather than be borrowed and lent
Some other products, however, might be better borrowed and lent rather than bought and sold Returning to the( Coase, 1972) Conjecture mentioned earlier, a durable good monopoly should prefer to lease its products rather than sell it. A whole literature has sprung up to prove the conjecture(see(Bulow, 1982)and (Stokey, 1979) for early work, and(Waldman, 2003)for a survey). Conversely, with competition, it is optimal to sell rather than lease. Most famously, IBM increased its sales/rental ratio competition intensified, from 0.46 in 1966 to 1.38 in 1983(see(Bulow, 1986)), and Xerox increases its ratio from 0.28 in 1968 to 0.85 in 1983(( Carlton et al., 1989)). Again, there is some motivation that the Landlord model has performance implications Finally, the literature on networks is explicit about the performance implications of broking. Unlike Creators, Distributors, or Landlords, Brokers seem to be useful for all types of assets. Theory seems to suggest that it is different types-brokers, dealers, market-makers--that may emerge for different asset types. For example,(Rust et al., 2003) suggest that market-makers might be"more appropriate for trading standardized commodities and assets for which the volume is sufficiently large to produce thick andactive markets. "(pg 354 ). Broking has performance implications more in its suitability for only certain types of firms. This is the point made by economic sociologists (e. g,(Burt, 1992),(Granovetter, 1973)), who posit that only certain firms-those in central positions-are well-placed to create and appropriate value The above discussion is not meant to be comprehensive. Instead, we want to make the simpler claim the proposition that business models can explain performance heterogeneity is consistent with a number of extant theories 4. DATA AND METHOD To test our claim, we selected a sample of segment-year observations, classified their business models, and then analyzed their ability to explain variance in financial performance 4.1. Sample of segment-Year Observations e chose the set of segment-year observations belonging to all 10, 419 publicly traded United States
11 Some other products, however, might be better borrowed and lent rather than bought and sold. Returning to the (Coase, 1972) Conjecture mentioned earlier, a durable good monopoly should prefer to lease its products rather than sell it. A whole literature has sprung up to prove the conjecture (see (Bulow, 1982) and (Stokey, 1979) for early work, and (Waldman, 2003) for a survey). Conversely, with competition, it is optimal to sell rather than lease. Most famously, IBM increased its sales/rental ratio as competition intensified, from 0.46 in 1966 to 1.38 in 1983 (see (Bulow, 1986)), and Xerox increases its ratio from 0.28 in 1968 to 0.85 in 1983 ((Carlton et al., 1989)). Again, there is some motivation that the Landlord model has performance implications. Finally, the literature on networks is explicit about the performance implications of broking. Unlike Creators, Distributors, or Landlords, Brokers seem to be useful for all types of assets. Theory seems to suggest that it is different types––brokers, dealers, market-makers––that may emerge for different asset types. For example, (Rust et al., 2003) suggest that market-makers might be “more appropriate for trading standardized commodities and assets for which the volume is sufficiently large to produce ‘thick’ and ‘active’ markets.” (pg. 354). Broking has performance implications more in its suitability for only certain types of firms. This is the point made by economic sociologists (e.g., (Burt, 1992), (Granovetter, 1973)), who posit that only certain firms––those in central positions––are well-placed to create and appropriate value. The above discussion is not meant to be comprehensive. Instead, we want to make the simpler claim: the proposition that business models can explain performance heterogeneity is consistent with a number of extant theories. 4. DATA AND METHOD To test our claim, we selected a sample of segment-year observations, classified their business models, and then analyzed their ability to explain variance in financial performance. 4.1. Sample of Segment-Year Observations We chose the set of segment-year observations belonging to all 10,419 publicly traded United States