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WTF Business Models


Bucking trends, conventional wisdom in pursuit of success.


Playboy Enterprises (PLA), the iconic purveyor of naked women with staples in the navel, posted a first quarter loss as the Internet continued to erode the company's print and TV revenue.

This raises a basic question: Can companies operate successfully with an old business model in a competitive and rapidly changing environment? Playboy bunnies aside, the answer seems to be yes.

Netflix (NFLX) depends on snail mail to deliver DVDs to customers. That makes about as much sense as newspaper publishers spending millions on new presses and having a kid on a bicycle deliver the final product to subscribers. But one wonders what happens to NetFlix when extensive broadband makes movie downloads from companies such as Time Warner (TWX), Comcast (CMCSA) and Dish Network (DISH) easily available with a few clicks of the handheld zapper.

The company, having gotten wind of this digital revolution stuff, recently introduced the NetFlix Player by Roku. The box uses a high-speed Internet connection that allows users to download from its library of 10,000 titles. They can then watch their selection on TV - no fumbling with antique DVDs. Imagine that.

The Internet eviscerated the music business, and its future distribution model remains unclear. Switching to CDs from LPs was a variation on the trusted theme of promoting popular singers and selling albums at a premium price. The next step is uncertain, especially for recording executives who apparently ignored or refused to understand the threat of downloads, file swapping and iPods (AAPL).

Privately held Pinkberry, active in New York and Southern California, adds fresh fruit in an effort to revive sales of frozen yogurt, a fad that appeared played out with the decline of TCBY Enterprises, now delisted. Fresh fruit may make Pinkberry the next hot franchise. Fresh, wholesome anything sells well in an overly sugared and homogenized world populated by thick-between-the-pockets customers who want to lose weight and eat healthier food.

There's nothing new or exciting about milk, unless you pitch it as "organic." The aura of health and wholesomeness is a company's comparative advantage and allows it to charge a premium price for a commodity product. Horizon Organic understood this and launched a successful IPO in 1998. Dean Foods (DF), which had a public relations problem with the bovine growth hormone rBGH, acquired Horizon Organic in 2004 and continues to market under the Horizon Organic name.

Going premium works well for old standbys that can be hazardous to your health, such as booze and cigars. Grey Goose Vodka, purchased by Bacardi in 2004, has nothing to do with Rooskies or potatoes, a common feedstock for the distilled drink. Grey Goose is made from wheat in western France. The pitch: Fancy bottles with snob appeal and endless flogging of awards no one outside the industry has ever heard about.

The once-hot cigar industry has gone up in smoke, a casualty of changes in discretionary consumer spending and rediscovery of the health effects of smoking. In the mid-90s, a string of cigar companies went public, including General Cigar (since acquired by leading matches producer Swedish Match) and Swisher International Group (now privately held).

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