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On Golden Streams
by John Fraim

During the California gold rush, one of the key ways wealth was created
was by panning for gold in streams. In effect, wealth was made by taking
advantage of "golden revenue streams" rather than by creating them.

After the great dot.com gold rush and crash, there is an important
lesson for business here. Rather than creating one’s own revenue stream,
it is often far more profitable to tap into another’s revenue stream and
help it grow and flow more efficiently.

In effect, revenue streams are really modern distribution channels. Even
products and companies with excellent revenue streams have weak areas
which are less profitable than other areas. Just as no stream flows
equally through its entire voyage, no revenue stream flows equally
through its entire voyage. There are narrow areas where the channel
flows faster and there are wide areas where the channel flows slower.

The revenue stream is difficult to see because most businesses focus on
the "upstream" source of revenue in product development and
manufacturing or the "downstream" value-added harvest of revenue in
markets and marketing.

But there is a third way between the beginning source and ending
destination of a revenue stream which does not involve the creation or
marketing of a product. Rather it involves establishing a connection
with an already flowing revenue stream between the source and the
destination.

Revenue Stream Strategy

A revenue stream strategy involves two strategic questions. The first
question is what revenue stream to enter. The second strategic question
is what particular location in a revenue stream to hold and exploit.

A few factors are relevant to the strategic question of what revenue
stream to enter. One involves the degree of matching of skills and
experience with a particular revenue stream. For example, a person who
has been a real estate agent might bring more value to a home buyer and
home seller revenue stream than one who has not been a real estate
agent.

Another factor involves what might be called a "revenue stream"
opportunity index. In this sense, even if one can bring skills and
experience to a particular revenue stream, there might not be a
"channel" opportunity because most links in the distribution channel
flow efficiently or are already defended by strong "third" parties who
have laid claims to strategic locations on the "banks" of the revenue
stream.

As a general matter, because of distribution inefficiencies, some
industries have higher opportunity "revenue stream" indexes than others.
In effect, their distribution channels may hold out greater profit for
increased efficiencies than others.

Once a particular revenue stream has been selected, there is the
decision as where the best position is to enter and defend: upstream
towards the source, mid-stream or downstream towards the end. Upstream
positions provide greater potentials for payoff while downstream
positions provide less potentials for payoff and greater real payoffs.
As an example, entering a deal at the "upstream" beginning, such as an
early investor, often brings with it stock options and grand promises
but little current equity. On the other hand, buying into a deal closer
to the "downstream" end, such as a stock holder, brings few promises but
current equity.

But apart from general locations, there are always weak links in streams
where the flow is not efficient. These areas are similar to bottlenecks
on freeways where traffic comes to a standstill. The challenge to one
tapping into the revenue stream is to redirect the traffic or add
another lane to help it flow more efficiently.

The Internet And New Exploitation of Revenue Streams

One of the mantras of the New Economy hype was that the Internet would
destroy these traditional revenue streams or distribution channels. The
word at the time was that traditional business distribution channels
would be "disintermediated." The suggestion in books like Blown to Bits
was that the "middle man" of distribution channels would become a thing
of the past. This was so because, as the argument went, there would be a
direct relationship between producer and consumer.

The fact is revenue streams and distribution channels have been greatly
changed but certainly not destroyed. In fact, the failure of many of the
dot.coms was really a failure of distribution channels and a renewed
recognition of the importance of the "middle man" in New Economy
marketing.

The change, rather than the destruction, of distribution channels and
revenue streams is one of the great (but still relatively invisible)
results of the New Economy. The Internet makes it easier, more efficient
and more controllable to tap into revenue streams via navigators,
intelligent bots and affiliate relationships. Instead of building Web
sites as stand alone products, new Internet entrepreneurs would be wise
to consider creating Web sites to tap into revenue streams of
established "bricks and mortar" businesses.

Yet ironically, much of the dot.com gold rush (and bust) was caused by
the creation of fictitious revenue streams. The technique had much in
common with the Hollywood deal where it has become a type of mantra that
a "rolling deal gathers no loss." Basically it involved creating a type
of value-added stream by attaching various elements to business deals.

An option agreement for a Hollywood film can show much profit without
ever creating a film or box office revenue stream. In the same way, a
dot.com business deal was able to create much wealth without ever
creating an Internet revenue stream. Like a film deal that attached
above line creative talent to deals, dot.com deals attached above line
VC talent to deals. In both cases, film and Internet deals, a vast
amount of money is made through a fictitious revenue stream before the
creation of an actual product.

Alignment Rather Than Differentiation

Today, differentiation is the marketing mantra. One differentiates by
creating a "better mousetrap" than the other guy. The business landscape
looks like a number of brands locked inside Medieval castles defending
themselves from the onslaught of competing brands.

But the wise modern business entrepreneur knows that streams flow in and
out of these castle fortresses. And also knows that he or she needs to
find commonalities with these fortresses rather than go into battle with
them.

In effect, the new business paradigm is alignment more than
differentiation. Not creating a new product but rather locating a
successful product being created by another and helping make it better.
In this sense, aligning oneself along the revenue stream of a major
brand may be a more effective strategy than differentiating oneself from
a major brand and fighting it.
Whether business and young entrepreneurs will be able to see this
different paradigm is difficult to say. Business philosophy today seems
to favor making "gold" rather than exploitation of golden streams. In an
entrepreneurial era, everyone wants to be a magical alchemist. But
business might be a lot better off if more alignments were made rather
than more battles fought.

Both of those grand, infamous, California gold rushes are over. Yet
there still is much gold to be made. Golden streams still flow down the
hills from the mother lodes. Others might own the rights to the mother
lodes’ sources of the gold. But this doesn’t mean they own all the value
obtainable from the gold.

And, yes, California is still true to its old motto as the "golden
state" producing gold for others to understand how to tap into.