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Here’s a great post on Blyk’s business model, the highly talked about MVNO operator headed by ex-nokia head, Telco2.0

 

“We thought it might be helpful to review the Blyk business model in a bit more detail following our pre-launch analysis where we were bearish on the company. Its business model ties in nicely with our 2-sided strategy for operators about which we have written on numerous occasions on this blog.

This piece, therefore, seeks to answer the following questions:
1.How does Blyk make money?
2.What are the benefits and risks of the business model? (Are we still bearish?)
3.What are the broader ‘Telco 2.0’ lessons for other operators?

News Glorious News
News flow from Blyk has been positive recently. It announced a few weeks ago that it has reached 200,000 customers in its first year of trading (versus its target of 100,000). This follows press releases in June that the company is set to expand operations in 2009 into other European markets, notably the Netherlands, as well as BelgiumGermany and Spain. All this follows investment (of an undisclosed amount) from Goldman Sachs and IFIC in January. The current squeeze on credit can hardly be helpful to an expanding start-up, but it looks like Blyk was lucky in securing funds ahead of the summer problems.

The Blyk Business Model

Blyk is an ad-funded MVNO focused on the 16-24 year old market (although they position themselves as a ‘media company’). It gifts minutes and texts to customers in exchange for the right to send advertisements to them. Users complete a set of questions about themselves when they sign up, giving Blyk information about their preferences. Advertisers market their products and services via text to Blyk users based on this profiling and Blyk gets paid to deliver the advertisement. So, at first glance, Blyk reverses the normal revenue model for operators: it collects money upstream and pays out for delivering services to customers:

Blyk%201.png

But this is too simplistic (and many who have commented on Blyk’s business model have been guilty of this) because Blyk actually makes money from both sides – from end users as well as advertisers:

1.Termination charges from off-net callers. This is effectively shown in the lower diagram of the chart above where we show operators as both receivers of money from end users (when originating the call) and receivers of money from other operators (when terminating the call). So every time a Blyk user receives a call or text from an off-net customer the originating operator pays Blyk for termination. In turn, Blyk obviously pays some of this termination charge out to its network supplier (Orange) but we guesstimate that the company still makes some margin on this.

2. Overage. Typically 16-24 year olds, like the rest of us, have a pre-determined communications budget – “I will spend £x on my phone each month”. The fact that Blyk gives users free calls and texts does not stop users from spending this money. Blyk’s users will simply display the same behaviour that every Telco exec is familiar with: increased communications usage as the price reduces (see this excellent piece on elasticity and pricing from the Ericsson Business Review). Because Blyk offers 217 free minutes and 43 texts, we believe that users will be profligate with their communications. They will use this free allowance up and STILL spend at least some of their previous budget.

Blyk%202.png

So how much revenue and margin does Blyk make? Well, we developed a model of the company and plugged in the following assumptions:

Usage Assumptions (Average per User per Month)

Makes 230 texts (13 more than 217 limit) Makes 50 minutes of calls (7 more than 43 limit)
Makes 5 minutes of voicemail calls (all above limit)
Consumes 1MB of off-portal web browsing
Receives 100 texts
Receives 50 minutes of inbound calls
Receives 120 advertising SMS
Receives 30 advertising MMS

Pricing Assumptions

Calls to any UK mobile network or landline (over and above free): 15p/min Calls to Blyk voicemail: 15p/min
Text messages to UK mobile networks (over and above free): 10p each 
Browsing off Blyk portal: £1 per MB
Price charged to Advertiser per SMS: 7p
Price charged to Advertiser per MMS: 22p

Cost Assumptions 

Off-net texts are terminated at 3p each On-net texts are terminated at 2p each
80% of outbound texts are off-net
Off-net calls are terminated at 5.1p per minute
On-net calls are terminated at 4p per minute
80% of calls are off-net
Off-portal browsing costs £0.50 per MB
On-net MMS are terminated at 9p each

Results

Our analysis suggests that, by combining user and advertiser revenues, Blyk could be making as much as £26 in revenue per user per month at a gross margin (defined as revenue less network costs only) of around 28%:

Blyk%203.png

In other words, Blyk makes around 2/3rd of its revenue from upstream customers (advertisers) and 1/3rd from users (overage and inbound):

Blyk%204.png

It is worth pointing out that Blyk has, thus far, been pretty successful at (a) attracting advertisers and (b) managing campaigns. In fact, response rates over a four week period of 116 campaigns were a staggering 29% last year towards the end of 2007:

blyk-5.png

29% compares very favourably to other forms of digital advertising (Source: e-consultancy, September 2007) and suggests both that young people are open to this value exchange (receiving ads and giving information up about themselves in exchange for free communications) and that even basic targeting is effective:

* On-line Advertising 0.02%
* Paid Search Advertising 0.2%
* Email 0.1%
* Direct Mail 2.0%
* Magazines 0.2%
* Direct Response TV 0.04%
* Radio 0.01%

Benefits and Risks of the Business Model

There is a lot about Blyk’s business model to admire. Compared with a traditional one-sided mobile operator Blyk has the following strengths:

Higher ARPUs. By introducing a second revenue source, Blyk can potentially more than double theARPU levels achieved by a traditional one-sided player.

Strong appeal to advertisers. Response rates appear to be so good that advertisers cannot fail to be impressed with the Blyk platform as a means of communicating with a traditionally ‘hard-to-get-at’ segment. They certainly seem to have signed up plenty of high-profile brands including WDK(drinks), Penguin (books), Sky Box Office (TV), Local Government (elections), Brylcreem (male grooming products), Boots (Retail). There are lots of examples on the Blyk media portal.

Strong appeal to youth market. Students on a tight budget will be seeking value for money and Blyk offers this in spades in return for relatively limited intrusion (users receive a maximum of 2 ads per day).

Speed to market. The simple approach to targeting (capturing user preferences when they sign up) is not particularly sophisticated and certainly way short of providing real-time behavioural targeting but it has allowed Blyk to launch and grow quite quickly – no operator has yet launched anything similar.

However, as we pointed out before, there are large risks for Blyk. Specifically:

Network pricing. Because it is an MVNO, Blyk is to a great extent dependent on the prices charged by operators for network usage (for origination, transmission and termination). In a competitive market like the UK, these are unlikely to be excessive but there is a margin risk for Blyk if these rise. Blyk would presumably be able to pass on the increase on the revenue it generates on inbound minutes and text but this would not be enough to offset the margin hit. In our model, we calculate that a 10% increase in network costs would see gross margin drop from £7.27 per user per month (28%) to £5.95 (22%).

Declining response rates. A 29% response rate is mighty impressive but this figure is likely to come down as the initial enthusiasm for receiving advertising diminishes and as Blyk penetrates more deeply into this segment and captures users who are less wedded to the ad-funded model. This has two potential impacts:

It may make advertisers less inclined to use Blyk which would reduce the premium prices that Blyk can charge advertisers for SMS and MMS messages.

It will impact the number of SMS and MMS messages sent over the course of a campaign which could have a substantial impact on advertiser revenues. To illustrate this, suppose that Blyk conducted a SMS campaign for an advertiser to 20,000 of its user base and achieved a 29% response rate overall (additional messages are sent only to those who respond up to a maximum of 3). We calculate that such a campaign could be worth £2,345 to Blyk. However, if the response rate drops to 10% (still quite high), then Blyk’s revenue drops by nearly 30% to £1,694:

Blyk%205.png

Given that advertisers account for nearly 2/3rds of Blyk’s revenue, this would equate to a 18% revenue hit overall (assuming stable subscriber numbers).

Operator competition. To date, no operators have followed Blyk into the youth market with an ad-funded model. But if Blyk shows signs of success, you can be sure that other operators will look for a piece of the action. Orange, Blyk’s network provider, has a youth skew and if it sees ad-funding as providing incremental value (rather than cannibalising subscriber revenues), then they are likely to follow suit. And Virgin also has a strong youth bias and could potentially copy the Blyk model relatively easily. Moves such as these are likely to drive prices down for advertiser media purchases.

Scalability. Even if Blyk could capture a large proportion of 16-24 year olds (which seems unlikely in saturated and competitive European markets), the cost Blyk spends on acquiring customers is likely to mean that EBITDA margins will be razor thin. Our 28% gross margin excludes operations, customer care (where it looks like they have had some problems) and marketing and sales costs. The latter is particularly concerning since Blyk uses people at university campuses to sign up prospects and capture profile information. This simply doesn’t scale effectively and the sign-up and data capture process will need to be automated as Blyk grows to improve both efficiency and the effectiveness of targeting.

Growth – eats itself. Ironically, it is because Blyk is so small that we calculate that 25% of its revenue could come from inbound termination of off-net calls and messages. If the company grows and more and more call and texts are on-net, Blyk continues to pick up the costs without the associated termination benefit. Like the voice arbitrage players, that make money by using the internet to reduce voice and fixed calls, it is to some extent a beneficiary of its small size for if it grows it loses a key revenue stream.

Lessons for Operators

1. 2-sided market opportunity is real. Perhaps the most obvious lesson for other operators is that there is value in 2-sided markets! Blyk may struggle to make a return for the reasons mentioned above, but it has already done enough to show that for operators with large existing (youth) customer bases the ad-funded model could be fruitful. We think this also shows the wider potential for 2-sided opportunities in the areas outlined in our report on the subject.

2. Different Business Model = Different Business! It is not mere marketing fluff that Blyk refers to itself as a media company rather than a MVNO. It shows that Blyk’s management considers the advertising community as its primary market and end users as ‘members’ rather than customers. This is important – a different business model is a different business. A two-sided approach for operators will require new customers, new metrics, new operational procedures and processes, new skills and assets (see below). It will be very, very difficult to build this within the existing organisation structure and operators should consider carving out the new unit and making it a customer of the core business.

The core business could even charge the new unit for using the customer and network data and other assets it requires for success. The ‘differentness’ of this future business was brought home to me recently in a meeting with two strategy executives at a leading European mobile operator who said that one of the key barriers to developing a two-sided business model is the current metrics used for business planning. Unless projects are shown to replicate the 40-50% EBITDA margin enjoyed by the current business, they fall at the first hurdle. The two-sided business is likely to be much less capital intensive than the current business so, while it may not generate such highEBITDA margins, EBIT margins could be equally impressive. .

3. Scale for success. We have oft pointed out the need to build scale on at least one side of a platform. I was delighted to see a media agency also voicing this recently when Grant Miller, joint MD of media agency Vizeum, explained why they had chosen AOL’s Platform-A for promoting Oasis’ new album:

“We need a property that has scale, tools and the technology to build a communications platform that delivers on all fronts. By bringing together all its individual properties, Platform-A represents a great opportunity to build a dialogue with the target audience.”

Blyk has done well from a standing start and its 200,000 users are clearly attracting brands.The real value to advertisers (and merchants, governments, developers, enterprises and other upstream customers) is from seriously large numbers of end-user customers willing to accept advertising and other telco-enabled VAS services. This makes the 2-sided telco opportunity most valuable to larger operators OR the operator community working collaboratively.

4. The power of a 2-sided pricing strategy. Blyk isn’t the first company to give stuff away. Google gives 99% of its products and service away to end users and Microsoft gives away its SDK for Windows to developers. What these companies do is subsidise one side of the platform and charge a premium to the other and thus seek to maximise value across BOTH sides. In Google’s case, its efficiency means that it can undercut other advertising channels’ prices and still make a handsome return. The ability to understand and use such a pricing strategy makes 2-sided players tremendously powerful as they can attack the markets of competitors that charge for services that they give away.

5. Cost control remains king. You’ve got your customer base on one side and you are building scale on the other side, so you’re sorted, right? Absolutely not. The platform will only thrive it not only provides an effective service (identification, authentication, advertising, billing, content delivery, customer care, etc.) AND does it more cheaply than can be found elsewhere. Google is winning because advertising is cheap for brands, Microsoft won on Windows partly because the platform, when bundled in with a PC purchase, was negligible. This means that driving costs out of the platform is critical. The high-cost nature of Blyk’s sales model and customer data acquisition is a worry and other operators looking to enter the market should seek to ruthlessly drive cost out of the system.

6. Customer data and CRM is core. Even with its relatively low-tech data acquisition approach, Blyk shows that targeting customers with the right message/product/service/solution really does work. Operators should seek to invest heavily in this area whether they pursue a 2-sided strategy or not because understanding their customers better can only improve the delivery of their own retail services anyway. A strong CRM capability becomes a must-have if they wish to become a platform player like Google.

Finally, what is Blyk’s plan for the emerging world of Voice & Messaging 2.0? After all, its target demographic is made up of exactly the same young early-adopter kids who most of the new V&Mplayers are targeting; but its product isn’t really geared to that. For example, they’re keeping a tight grip on the data pipe, and it’s 2G only. And there’s no sign of a developer community.

However, Blyk does have capabilities most MVNOs don’t – it has its own complete Nokia Siemens Networks-provided core network, not just an HLR plugged into a partner’s network. So, how long before there’s a Blyk API to play with? Or do they fear cannibalisation too much?

Microsoft and Yahoo! have been struggling ,as we all know, to monetize the real estate of the Internet World, i.e the Page Views. Where Microsoft lost about 250M$ in the online business last quarter, Yahoo also suffered a 23% drop in their net earnings in the same quarter. It’s not that these giants don’t know the business, they just seem helpless especially since they have no share in the strongest online business value chain, i.e. the Search. No wonder google still raked in a kewl 17% increase in their annual revenue.

While Microsoft was busy writing petitions against a possible buyout of double click by Google, Yahoo was busy firing its employees and trying to lower the opex to show healthy earnings to its investors

But Investors are smart and they can clearly see the Armageddon. They know that Dinosaurs did extinct and so can Yahoo.

But was Yahoo sleeping the whole time? No

Jerry Yang,Mr Yahoo, tried to reinvigorate life back in Yahoo management by calling a 100 day management review last year in July. Here’s a presentation

Irony is that do u really need a 100 days to identify a disease that has such visible side effects. When you don’t have a share in the Search market, no matter if your clicking Trillion page views you just cant make money. For the four weeks ending in January 2008, Google accounted for 65.98% of U.S. searches, while Yahoo! and Microsoft combined amounted to just 27.84% of searches.

The second big question for Yahoo has been how to enter the SNS market. But Can you really sell the concept of making money by doing SNS now to Investors, NO? You could have 2 yrs back,but you wont have the back of your investors to invest into the SNS space especially When Google’s struggling to monetize their Myspace inventory

So does this mean the quest to make money on Social networking sites is never ending?

Well Microsoft seems to think otherwise, especially since they’ve been acting happy about their investment and the advertising deal with Facebook. Hmmmmm……

Does all this hint that Google is the Achilles with out the week heel ?

O Sorry, not yet the Giants are trying their Last move…..lets wait until then…

Here’s more stuff for you to munch on the deal: Cnet

Social networking is one of the biggest and fastest-evolving phenomena on the Web, and Microsoft’s proposed takeover of Yahoo will undoubtedly send it in new directions. More than anything, a MSFT-YHOO acquisition will shake up the debate over just how you can make money off a Facebook or MySpace.com–because they’re running out of time to figure that out.

Should the Microsoft-Yahoo acquisition go through, expect them to try to corner the social-network advertising market.

The common wisdom is that neither Microsoft nor Yahoo is a real force in social networking. Both companies own multiple social media properties, and the only resounding success among them is Yahoo’s Flickr. (Sorry, Microsoft, I’m not counting the Zune’s “song-squirting.”) “They’re very interested in the space,” Forrester Research analyst Charlene Li said in an interview with CNET News.com. “They haven’t been able to get traction in it. They look at it very longingly.”

Social networking, in addition, will be a tasty slice of the Web for a hypothetical Microsoft-Yahoo because it’s also one of the few niches of the Web on which Google doesn’t already have a stranglehold. Its OpenSocial developer initiative isn’t ready yet, its Orkut social network has only gained traction in a few regions of the globe, and the company admitted in its recent quarterly earnings call that social advertising (specifically on News Corp.’s MySpace) isn’t bringing home the bacon.

Taking the reins on the advertising market is probably the best way for Microsoft-Yahoo to make waves in social networking without actually launching a big social-media initiative–and I certainly hope they don’t try to, because there are way too many networks out there already. Microsoft already has a foot in the door with its $240 million stake in Facebook. (Yahoo tried to acquire it outright in 2006 and was promptly spurned.) And Facebook’s own Social Ads were met with high-profile opposition and plenty of bad press.

With Microsoft’s and Yahoo’s resources pooled, the two companies could devise a more effective social advertising strategy (if such a thing is even possible). Even if it’s dubious in its effectiveness, expect it to be very high profile. Think about it: Microsoft-Yahoo could claim they’re doing what Google couldn’t do. How’s that for instilling confidence?

“A potential acquisition, if it actually goes through, could be a much, much more interesting player for Facebook to want to do business with,” Li said, noting that Facebook’s current deal with Microsoft only covers display advertisements, not search ads. “If Microsoft and Yahoo can actually make a play in search, that makes Facebook a lot more comfortable going with an all-Microsoft deal and maybe even be acquired by it. Who knows?”

But beyond advertising, a combined Microsoft-Yahoo has a massive social-networking tool at its fingertips, Li continued. “Yahoo and Microsoft both have this wonderful asset called e-mail address books and instant-messaging buddy lists, which are essentially a social graph,” she said. “A lot of people are using those services, much more so than Gmail, for example, and so that’s an instant social graph.”

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How much Facebook earned last year? 50 million?, 100 million?

The actual figure is $150 million which Facebook’s 23-year-old CEO Mark Zuckerberg revealed in a company wide open call. Obviously Mr Zuckerberg didn’t think that these details could be leaked.

The Times carried an article on how the leaked figures look like.
Overall, the details are pretty interesting and show how the company is bracing up for the future. They say that they are going to invest $200 million of expenditure which looks like to be mostly on storage capacity. With millions of photos on facebook, that’s sure going to be a good investment.

What obviously doesn’t come up here is whether Facebook would be making any acquisitions ? I myself would think that if they had a cash pile, then an overture(which was acquired by yahoo) like acquisition would be the best investment for them given that all of their earnings come from serving ads.

Its true that Microsoft handles it for them now but given that Facebook’s revenues are all from ads – I won’t keep something as important as that disassociated from the company.

Let’s see how’s facebook performing in the context of SNS advertising market

Here’s a presentation on SNS(facebook) market valuation …to help you understand where facebook stands today in the over all SNS advertising market…..

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