reinventing_your_business_model.pdf

50 Harvard Business Review | December 2008 | One secret to maintaining a thriving business is recognizing when it needs a fundamental change. 1711 Johnson.indd 50 10/30/08 2:02:02 PM | December 2008 | Harvard Business Review 51 Ji m F ra zi er by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann IN 2003, APPLE INTRODUCED THE IPOD WITH THE ITUNES STORE, revolutionizing portable entertainment, creating a new mar- ket, and transforming the company. In just three years, the iPod/iTunes combination became a nearly $10 billion product, accounting for almost 50% of Apple’s revenue. Apple’s market capitalization catapulted from around $1 billion in early 2003 to over $150 billion by late 2007. This success story is well known; what’s less well known is that Apple was not the fi rst to bring digital music players to market. A company called Diamond Multimedia introduced the Rio in 1998. Another fi rm, Best Data, introduced the Cabo 64 in 2000. Both products worked well and were portable and Business M del Reinventing Your 1711 Johnson.indd 51 10/30/08 2:02:12 PM Reinventing Your Business Model 52 Harvard Business Review | December 2008 | stylish. So why did the iPod, rather than the Rio or Cabo, succeed? Apple did something far smarter than take a good technology and wrap it in a snazzy design. It took a good technology and wrapped it in a great business model. Apple’s true innova- tion was to make downloading digital music easy and convenient. To do that, the company built a groundbreaking business model that combined hard- ware, software, and service. This ap- proach worked like Gillette’s famous blades-and-razor model in reverse: Ap- ple essentially gave away the “blades” (low-margin iTunes music) to lock in purchase of the “razor” (the high-margin iPod). That model defi ned value in a new way and provided game-changing convenience to the consumer. Business model innovations have r