We know the story by now: as it becomes less and less expensive to transfer digital content, the price firms can get for information-based products and services is being driven down. This has led to chaos in the music, news and publishing industries. So everyone in these industries is doomed, right? Wrong. I believe that successful business models in information-based industries can be built if you focus on three key skills: aggregating, filtering and connecting.

I’ve talked about how this is true for people, and also for large firms like Amazon. But what about medium-sized companies? Doesn’t all the money go to the big ‘aggregators’ like Amazon and Google? Not necessarily. A great example of a smaller firm that has been very successful in the information-based industry of publishing is O’Reilly Media. Today I’d like to talk a bit about why I think they are doing well. But first, let’s hear why Tim O’Reilly thinks they’re doing well:

Tim O’Reilly makes the argument for Open Publishing @ TOC 2009 from Open Publishing Lab @ RIT on Vimeo.

Right off the bat, he characterises the firm as ‘connectors’. O’Reilly works to spread ideas (connecting ideas to people), and then uses the connections that are made to generate money. It’s a pretty good business model, and one that I think will continue to work. Here are some more examples:

• First off, O’Reilly filters by specialising – they are not a general publisher. Here is Tim O’Reilly’s broad business goal:
  

  Here’s mine: To become the information provider of choice to the people who are shaping the future of our planet, and to enable change by capturing and transmitting the knowledge of innovators and innovative communities.

  To do this, they primarily focus on publishing books on the internet and open source technologies, programming, and systems administration are probably their core areas, but they also look at other digital topics like security, digital photography and information design. When building their business models the first thing that smaller firms need to do is to find something in which they can be the absolute best.

• Once they have filtered by specialising, O’Reilly aggregates in a couple of ways. One way is through the conferences that Tim O’Reilly mentions – they draw thousands of people that are interested in the O’Reilly core topics. It’s likely that most of the people that are interested in writing on these topics show up at these conferences. They also aggregate by building a community around their work. In addition to the conferences, they do this by hosting online user groups and forums, providing training, and giving away a lot of relevant content through blogs, white papers, and free downloadable copies of many of their books. All of these activities pull in the people that are most likely to contribute great new content themselves.
• When I talk about connecting at the personal level, there are two directions of connections. People connect up ideas, and this is how they create value. They then connect their ideas to people – this is how they get their ideas to spread. It is roughly the same for firms. First, they create value by connecting up their value network. In the case of O’Reilly, part of how they do this is by taking a highly activist role in the editing process. As John Scalzi humourously points out, publishers provide a number of services that are critically important to authors. Connecting authors to the right resources is a key part of building the value network at the back end – ultimately, it is the value network that creates economic value.
• The second part of connecting for firms is getting your ideas to spread. I think that this entails much more than marketing. It is built upon meeting the needs of your customers and business partners. Again, O’Reilly takes an approach that is different from most publishers. They have been much more willing to provide free downloads of books – sometimes this hurts sales, but sometimes it has driven sales. In both cases, it has helped to build the community. They also get their ideas to spread through the conferences. As this week’s TED conference has shown, when you have limited space available for a desirable event, you can charge people a lot to attend. One of the ways that people get their money’s worth from such events is to tell everyone they know about them – which spreads the ideas.

Tim O’Reilly wrote the book (well, the article) on Web 2.0 – and he uses the principles he has outlined to build his company. There isn’t anything new in any of the individual actions that O’Reilly Media undertakes – the thing that is unique is the way that they have combined things.

This is a great example of business model innovation. They are not delivering books, they are delivering ideas. Once you make that key switch, there are many new opportunities available. The O’Reilly Media business model is based on skills in aggregating, filtering and especially connecting. These are the three critical skills that you need to build successful information-based business models – whether you’re a person, a huge firm like Amazon, or a smaller firm like O’Reilly Media.