Friday, November 1, 2013

What makes a great information business?

There are a million (mostly small) information businesses - they seem to pop up in every industry, every geography, every segment.

And here's the brutal truth: most of them are lousy businesses.

Why lousy?  A variety of reasons.  Some, for example, have fundamentally screwed up their pricing models, leaving most of the value they deliver in their customers' hands, rather than their shareholders.  Others are intensely nice-to-have...but not need to have.  Still others have readily available substitutes in the market, leading to a lack of market/pricing power.

All of which leads us to the question: what makes a great information business?

Having spent many years investing in and studying the information services market, I've come to the conclusion that great information businesses have three things in common:

1.  Proprietary data or insight...  This one is fairly obvious - but too often overlooked.  To be clear, proprietary means that the core intellectual property is both (a) hard to replicate and (b) has no easily applied substitute.  The most potent substitute?  Gut instinct (or said another way, sometimes the biggest competition is using no information supplier at all).

2.  ...embedded in a business process...  This is the single most important element of great information businesses.  Embedded means that the data or insight is weaved into a business process such that the removal of it causes the process to fail to work appropriately.  In shorthand, embeddedness is best characterized by (a) high frequency of use and (b) high importance to the business process.

3.  ...and delivered through software.  At the end of the day, what is software?  Simple: it's the instantiation of a business process.  So, where better to inject data or insight to improve the business process?  For example, supplying spreadsheets of data to prioritize prospective buyers can be useful - but injecting that data into the CRM system your salespeople use is much more powerful.   And, of course, software provides great operating leverage.

In a nutshell: great information businesses are built on proprietary data, embedded in a business process, and delivered through software.

What do you think?  Anything to add to this mental model?