Archive for the ‘Telecom’ Category
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 Belgium, Germany 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:
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.
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
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
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
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%:
In other words, Blyk makes around 2/3rd of its revenue from upstream customers (advertisers) and 1/3rd from users (overage and inbound):
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:
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:
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?
After being in private beta for the last three months, Playyoo is opening its doors for everyone this morning. The site is aimed at casual gamers who like playing games on their mobile phones. Like Kongregate, game developers can show off their wares and interact directly with the people playing them. Better yet, anyone without programming knowledge can use Playyoo’s WYSIWYG game creator tool to create one of six game presets of simple games like pairs, tic tac toe, snake, and ping-pong. While the amount of customizations on these gaming presets is fairly limited, the titles uploaded by real game developers tend to have a little more depth. Developers with existing projects can simply port them over with a Playyoo-supplied template for Flash 8 Pro or CS3.
In terms of cost, if users find a game they like, they can download it to their mobile phones free of charge. The entire service is run by advertising, which shows up both on the site and on the games when you start them up.
What I really like about Playyoo is that it supplies each user with a customized “game stream” that can be tweaked similar to Facebook’s newsfeed so that certain game genres show up more or less than others (get a peek at this after the jump). It makes it easy to discover new content as it comes in. Likewise, Playyoo users can send recommendations to one another if they come across something cool or worth playing.
Playyoo currently supports a pretty massive variety of phones. It’s also nice enough to let you know how many games out of the entire library your phone can handle, along with providing a bandwidth limiter you can set to automatically cut you off of after burning through a set limit of data. While the graphics of the titles may not blow your socks off (like the upcoming Vollee service) you can’t beat the price, and the potential for the game creator Web app is promising for folks like me with little to no coding skills.
More screens after the jump.
Ribbit, a platform for building web-based voice applications, has officially launched today to a bit of fanfare, as it rides two of the year’s big trends: open development platforms and web-based VoIP. We first caught wind of the company back in August, when we learned of their plans for making and receiving calls via a flash player that can be embedded on any web page.
Since then, I’ve personally become a big fan of services like Jajah and Jangl for making international calls, and we’ve seen Jaxtr, which offers a flash-based widget for making calls via your friend’s blogs and profiles, blow up to 5 million users. While social networks have served as a vehicle for the “three Js of VoIP” to take off, all three of these companies had deep funding and needed to make significant investments in infrastructure to make their services possible (Jangl and Jajah even partnered up to share the burden).
By offering the technology platform for web-based VoIP, Ribbit is looking to significantly lower the barriers to entry for application developers. For an example of their technology, Ribbit has built an app for Salesforce.com that allows users to make calls from within the interface and will then keep track of call records, transcripts, etc, in turn bringing voice inside a CRM tool, which, is sort of what I was envisioning when I opined that Google should buy Jangl and Pluggd and integrate them with Gmail. While a businessy-app like this might not sound sexy, it gives you an idea of the type of products you might be able to build for consumer-based social networks like Facebook, or, as stand-alone new services.
Ribbit’s business model is a smart one: charge third-party developers a subscription fee based on the number of users their application attracts. This is good for both the developer and Ribbit – no costs up front, and both parties win if a service takes off. The company has raised $13 million in venture capital, so they’ll have some time to ramp up.
On the other hand, the aforementioned current leaders in web-based VoIP could also move towards offering their own development platforms, allowing users to expand on what are already a pretty good set of tools for web-based calling. As far as the business model, they can offer these developers a share of revenue that the applications generate through more calling minutes.
In any event, it will be interesting to see what types of applications users start building with Ribbit, and if their competitors start moving in a similar direction to fuel further growth. Definitely a space to watch in 2008.
More on Ribbit from Telco 2.0
We’ve been putting together a directory of all “2.0”-type players for our forthcoming Consumer Voice & Messaging 2.0 Report. One newcomer, Ribbit, is offering an early foretaste of what the future environment for developing voice and messaging services might look like.
Ribbit reckons it’s “Silicon Valley’s First Phone Company”. Silly us, we thought that was AT&T. So what is it? The actual product is a VoIP softswitch, available either as a standalone installation or a hosted service, which offers an unprecedentedly extensive collection of APIs for developers to work into their sizzling lashups. Then, there’s a Flash toolkit intended to let the front-end developers design interesting user interfaces to the system’s voice functions, whether on desktops, laptops, or mobile devices. All very Telco 2.0, really.
Perhaps the most impressive thing about Ribbit is that one of the existing applications for it integrates it into Salesforce.com, the hugely successful web-based sales/CRM system; you can’t get more platform-based, enterprise-focused, or two-sided than that. We’re sure there’s huge scope for creativity and user-driven innovation here; but there are some issues that worry us.
Ribbit’s managers are very keen to beat up telcos. Who isn’t? But all the aggression they direct towards “the phone company” may yet come back to bite them. If they want to have nothing to do with carriers at all, relying fully on IP and third-party SIP carriers for their PSTN integration, that’s all well and good; but it may be a bad business decision. The enterprise VoIP market is crowded, and trying to chop out a niche there means competing with Cisco Systems, Nortel, and Microsoft – all of whom have the advantage of huge installed bases of equipment already in the enterprises they’re trying to sell to. Further, the tech-clued firms who are most likely to be interested in Ribbit already have other options – notably Asterisk, the open-source IP PBX, and Red Hat’s JBoss comms platform.
On the other flank, there’s the risk of being cut out as telcos begin to introduce new services; location, availability, social graph, and other contextual or user data are exactly what these enterprise developers will want to build into their systems. They will be keen to use existing telco APIs rather than build their own capabilities from scratch. If Ribbit isn’t in a commercial position to use them, there’s no gain in using it rather than either a telco service or roll-your-own. And given the initial telco-hostile tone, should Ribbit prove to be highly successful, telcos will doubly have a reason to fear an intermediary platform getting all the developers and intermediating the commercial relationship.
Success, therefore, will come from being able to work both in the telco sea as well as the Web 2.0 land.
Further in the future, though, highly reconfigurable telephony is likely to lead to radically different product and business models for telcos. For example, civil engineers stamp out custom bridges off well-tested models based on span, load, and topography. Your telco consulting services arm will be building custom communications experiences, with the software equivalent of a flexible manufacturing system. Custom back-ends, process flows and user interfaces will be generated from tools and models. Each is created appropriate to the application and user context. Most devices will have a completely “soft” and re-configurable user interface. (Indeed, if you can create the service and the user interface as required, why not the hardware too? It may sound crazed, but projects like the RepRap might soon make it a reality.)
“Minutes” on the network will be the least important part of the business model. But counter to previous wisdom, the money’s not in telcos launching dozens of services all the time. (Ah, so you’ve been reading the same SDP vendor brochures too?) It’s in supplying platform and services capabilities to upstream partners, who have the knowledge and intimacy of the end user.
Even before then, flexible manufacturing systems using commercial rapid prototyping systems and standard electronics could mean that Ribbit’s Flash toolkit could become, well, a very flashy toolkit. It’s perfectly possible to build a profitable business around custom handsets of volumes of 10,000 or under. There’s likely to be a thriving market of niche communications tools and devices. We’d focus on where the operators and technology competitors are technically weakest — the user interface — become the toolsmith for that. At the moment the commercial model for the back end platform is too uncertain, and competition too fierce. A toolkit for building the presentation layer could work across all the major back-end platforms, and could be Ribbit’s premium service — if, that is, they find a sound enough business model to get there.
The Apple Digital Media Platform has been one of the runaway hits of this decade and driven a 400% gain in Apple’s share price over the last three years. Yesterday, Steve Jobs announced the entry into the movie rental business and a new version of the Apple TV Set Top Box. The bigger story which went unmentioned is that business model underlying the platform is showing real signs of strain and the players are showing signs of restlessness.
Apple (AAPL), Google (GOOG) and Microsoft (MSFT) Three Year Share Performance
The Apple Digital Media Platform is a classic example of a multi-sided business model. As the user base increases, the more appealling and less risky it becomes to develop new hardware devices. As more hardware devices are sold, the more appealing it becomes for people to develop accessories. As the user base grows, content owners realise that it becomes an interesting distribution channel to sell content. As more content becomes available then more users are driven to the platform. As volumes increase then margins paid or royalties received from third parties can be increased.
In other words the Apple Digital Media Platform exhibits a high degree of positive network externalities or displays a virtuous circle .
The multi-sided Apple Digital Media Platform
The software platform itself has evolved from the inital release of Quicktime in 1991 on the Mac and in 1994 on Windows. It has always been available for free to users. The interesting strategic decision was to make Quicktime available for Windows from very early on, even when no revenues were being earnt.
The probable reason for this decision is that the Mac has a very small market share compared to Windows and Apple needed to have the broadest possible market available to make it appealing for content creators to make their content available on the Apple Digital Media platform. In these early days, the QuickTime platform was only of value in so much as it created extra sales of Mac hardware.
This changed in 2001 when Apple launched the ipod device and itunes software. This software allowed the synchronisation of music content between the Mac or PC and the ipod. Apple was now generating revenue from having Quicktime and the itunes software available on the PC as it now had a much larger addressable market. Effectively at this stage, Apple was effectively adopting a highly unusual give away the blades (software) and sell the razors (hardware) strategy.
This strategy should be compared and contrasted to the Games Console platform players who have adopted a strategy of discounting the hardware (consoles) and charging a premium for content (games).
It should be noted that at this time illegal file sharing had just kicked into gear with Napster reaching its peak popularity in 2001 and despite its closure it spawned many other yet more creative ways for the music lovers of the world to break the law.
It is therefore hardly surprising that in 2003 when the iTunes online store was launched it was welcomed with open arms from the record companies especially considering that tracks were to be charged at 99 cents with DRM and Apple wasn’t trying to make any profits from the download service.
The only internet infrastructure company making any sort of money from the iTunes stores was Akamai who Apple had chosen to build the Content Delivery Network and assure that tracks reached their destination in a timely manner. This relationship exists to this day and to my knowledge no ISP has ever directly profited for the Apple Media Platform.
As the iPod grew in popularity it began to attract the trivial (eg protective casing) and not so trivial (eg external loudspeakers) accessory providers. Apple designed a standard interface across all the ipod range to make life easier for the accessory makers. Apple apparently charge accessory providers a royalty for using the “Made for iPod” seal. The royalty rate is not in the public domain, but is estimated to be as high as $4/device.
This accessory market has grew to an over $1bn market. Accessories are also important for iPod independent retailers as they tend to have higher margins than the iPod itself. It is estimated that for every $3 spent on iPods $1 is spent on accessories. It also helps the independent retailers to differentiate against the Apple owned retail stores who don’t tend to stock all the accessories. Apple estimated that in FY2007, direct sales were a huge 57%.
The iPod has scaled huge heights with 52m sold in FY2007 compared to just 7m Macs or $8.3bn in ipod revenues compared to $10.3bn Mac revenues. Another example of the positive network externalities is that the iPod is creating positive momentum to Mac sales with a full 50% of Mac sales in FY2007 being new to the Mac. Undoubtedly a large proportion of these new users are attracted to the Mac because of the style and panache the ipod has added to the general Apple brand.
Apple launched in 2006 the hugely anticipated iPhone and has managed to sell 4m of these in the first 200 days. Apple claims this is equivalent to a 20% share of the US smartphone market in 3Q2007. The iphone adds a new twist to the model in that Apple have decided to grant exclusive rights to a single network operator in each country. This has enabled Apple to get a share of all voice and data revenues from the service. This share is estimated to be around 30%.
One of the few recent failures was the initial launch of Apple TV set top box. This has been redesigned and relaunched along with the addition of a movie rental business. Video capability was added to QucikTime back in 1999 and recent iPods have feature small screens for viewing content. 125m TV Shows and 7m Movies have so far been downloaded from the iTunes store.
Apple has recently broken through the 4bn music tracks downloaded level and now accounts for an estimated 70% of the worldwide digital download market with 85% share in the crucial US market.
Sales of Offline and Online Music 1H2007
It is hardly surprising therefore that tensions are starting to emerge with the record companies who are having rather a hard time of making money with the overall market declining in both revenues and volumes. The record companies seem to be fighting hard against the Apple DRM lock-in which currently allows Apple to tightly integrate both hardware and software and keep non-approved third parties out of the chain – there is very little interoperability.
All of the four major labels are allowing Amazon to distribute non-DRMed tracks at variable pricing. In fact Amazon has arranged a huge promotion with Pepsi to try and kick-start the platform attracting users by giving away up to 1bn tracks. This is similar to some of the earlier iTune promotions. We think for record companies although this reduces the dependence on Apple, it does not alter the fundamental deficiences of a “per track” business model.
More interesting solutions are the subscription services which has allowed digital sales in South Korea to overtake physical sales. All mobile operators have cheap all you eat subscriptions which are very popular with an estimated 1 in 6 subscribers taking out packages. Even the hugely popular online Cyworld game has managed to sell 200m tracks. However not everyone is positive, john Kennedy, the IFPI chairman recently warned “”Is Korean music market a panacea for the digital music market internationally or a case study in the devaluation of music?”.
A simlar story exists in Japan where mobile sales far exceed online sales. In addition Japan was the only region in the world where Apple actually saw falling revenues – drop 11% to US$1bn with only 300k Mac sold.
Universal Music Group is experimenting with subscription offers for the Neuf Cegetel ISP in France with an all-you-can-eat offer and also Vodafone and Telenor are experimenting with subscription offers for all the major record companies with the Omnifone platform. These are real challenges to underlying economics of the Apple platform. It cannot be long before Verizon fights back in States with some sort of innovative offer, especially as arch-rival AT&T has exclusive rights to the iphone.
The Mobile Industry is a classic cheap razors and expensive blades market: handsets are subsidised with expensive calls and ultra-expensive texts. Operators throw off prodigious amounts of cash which can be used to subsidise and market new applications. Apple are trying a model of both expensive razors and blades with limited distribution – we do not believe this strategy will not work for the mass market.
The other big issue for Apple is that long term platform rival Windows is finally starting to gain some traction in the mobile market as the operators are starting to realise that perhaps Microsoft are not as evil as everyone thought at the turn of the century. Certainly some mobile operators are already using Microsoft as a way of challenging the revenue share that they have to pay to Blackberry in the corporate messaging market. The Microsoft platform is extremely open compared to both the Blackberry and Apple platforms and also they don’t (yet) want a share of the ongoing revenues. Microsoft may be historically one step behind Apple in terms of technology, usability and more especially design, but they have always been one step ahead with the business model.
And this is all before, Google really enters the market with its advert funded model. A lot of people, we speak to about both the iphone say the most brilliant application is the maps which was written by Google and uses Google data. There is no way that Google will not port that application to every handset under the sun ultimately financed by some sort of advert funded model. In fact, there is already inferior version available for Windows, PalmOS and Symbian-based handsets.
In other words, Apple faces a lot of pressures from all corners of the platform.
In the short term, most of the platform pricing issues can be overcome with a little bit of tweaking to the model. Apple has larger issues in the medium term as the powerful content owners begin to ensure that there is competition in the digital distribution of their products. We do not believe the movie content owners will allow Apple anywhere near an 85% market share and over time the music companies will bring Apple share of digital downloads down as they strike subscription deals with the ISPs and Mobile companies. In the longer term, device makers will catch up with Apple usability features and we believe Apple will never have more than a niche share in PCs, mobile phones or set top boxes.
However all is not lost for Apple shareholders, the market segment who are attracted to the Apple digital lifestyle will tend to be higher income and prepared to pay a premium for their products which should allow a profitable future but at much slower rates of growth than in past few years.
The main lessons to be learnt from the Apple platform for the Telecoms industry are:
– it is relatively easy to continually innovate and add features to platforms over time; – multi-sided markets can be very profitable growth drivers;
– wholesale intermediaries tend to have increasing returns to scale, thus market concentration; and
– it’s better to enter a new market with a disruptive business model than a disruptive product proposition
One of the themes for Telco 2.0 in 2008 is two-sided markets and their potential impact in the Telecoms industry. We are planning on releasing a research report in March which examines the platform opportunity for operators. And this is, of course, the core focus for our 4th Telco 2.0 Executive Brainstorm on 16-17 April.