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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?

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We ‘ve all been reading a lot about the latest in the Social Networking Space(SNS) facebook, myspace etc etc ….But what’s keeping the Chinese busy…. especially when almost every 5th Chinese has access internet, a staggering 200Mill number of internet users……..

Here’s a detailed analysis (post on readwriteweb.com,covering the latest report from China Internet Networking Information center-CNNIC ) of the Chinese SNS and the Internet space

Do post your comments if you happen to know more about Chinese Internet Market

According to latest report from China Internet Network Information Center (CNNIC), by end of 2007, there are over 200 million Internet users (including 163 million broadband users) in China. 2008 is shaping up to be a very busy year for the Chinese Internet, and the Chinese market seems to be pulsing with social networking activity. But for Chinese Internet users, social networking has taken on a very different form than it has in Western countries. In China, the most popular form of networking may just be the traditional Internet forum system, or BBS.

That’s not to say traditional social networking is dead — far from it. You can find QZone which is owned by Tencent with the support of QQ’s over 220 millions active users. Then there is 51.com which proclaims 160,000 new users daily; Linkist and Wealink are two popular professional networks based in Shanghai; Tianji.com is another professional network based in Beijing and it has partnered with Viadeo, one of the world’s largest online business communities to create a premier business platform for online networking between China and Europe; Xiaonei, Zhanzuo and many others are sharing the campus social networking market.

With its massive user base, the Chinese market is naturally one of the most attractive places for Western networks to attemp to set up shop. MySpace has set up an office in Beijing; Facebook might acquire a Chinese SNS, Fenbei.com, and surely will have local presence in 2008; Friendster has done very well in the South East Asian market and expects similar success in China. Xing, a professional network from Europe, set up a Chinese office back in 2005; Last.fm is trying to be more localized in China to compete with 9Sky, Yobo, and 8box.

Surprisingly, though, one of the most popular methods for Chinese netizens to communicate exists far from the web 2.0 scene: traditional Bulletin Board Systems (BBS). BBS actually plays a very significant role in Chinese Internet life. In China, registered BBS users have reached 3 billion (one netizen might register at multiple BBS sites); 80% of Chinese sites are running their own BBS and the total number of daily page views across bulletin board systems has reached over 1.6 billion, with 10 million posts published every day. The BBS is an undiscovered and untalked about Chinese Internet phenomenon. To understand more about why BBS is so hot in China and how it will co-exist with modern social networks, we interviewed Kevin Day the CEO and founder of Comsenz Inc., owner of Discuz!, the first ever social platform – a BBS system – for the Chinese Internet. More than 400,000 BBS sites are built on the Discuz! system in China, or in other words, Discuz! controls over 70% of the Chinese BBS market.

The Phenomenon of Chinese BBS

According to a report produced by iResearch Consulting Group in 2007, around 36.3% of users in China spend 1-3 hours per day on BBS sites, about 44.7% of users spend 3-8 hours, and even 15.1% of users are on BBS sites for more than 8 hours each day. Over 60% of users will log in to at least 3 BBS sites more than 3 times each week.

According to the report, the primary reasons for using BBS sites is finding solutions to problems, general discussion, finding information, and sharing life experiences. 98% of users have contributed to a BBS by publishing articles, replying to posts, participating in polls, etc. Users tend to trust BBS sites because they think the information found on them is first-hand, updated frequently, and presented in a comfortable, community environment.

Chinese BBS life has apparently extended offline, as well. The report also says 64.5% of users have attended some offline events organized by BBS administrators or users. More than 80% of users are using BBS sites to search for information about products they plan to buy, and 61.7% of users are keen to ask other BBS users for opinions before making a purchase. Astonishingly, BBS sites are even acting as ecommerce hubs themselves, with 47.3% of users having bought products directly from a BBS.

The screenshot below shows a BBS set up by the fans of Jinglei Xu, a very famous Chinese celebrity and blogger. This site has over 65,420 registered users, and you can find thousands of online communities like this one built on traditional BBS software.

The History of Discuz!

If you ever log onto a Chinese BBS site, most likely it is built on the Discuz! system. Discuz! was originally developed by Kevin Day when he was at his first year in university. In 2002, the first version of Discuz! was sold to a Hong Kong based company, and in 2003, Day decided to discontinue his studies and founded Comsenz Inc. in 2004 in Beijing.

In 2005, Comsenz Inc. partnered with Zend and established the Zend China support center. Later in 2005, Day announced that Discuz! was going open source, which has been described by local media as an earthquake for the Chinese software industry. Comsenz Inc. got its first round of funding for around $10 million from Sequoia Captial, Morningside, and Google in 2006.

Now Comsenz Inc. has grown to a household name with 200+ staff and a complete product line that includes Discuz! (bulletin board), X-Space (social Network platform), SupeSite (content management system), ECShop (open source B2C and C2C system) and SupeV (online videosharing system). It is also running a few Internet services, including a free forum hosting service 5d6d, a free B2B shop hosting service Maifou, and a community advertising network Insenz. Day is just 26 years old, but he has been publicly recognized as the one of the most successful entrepreneurs born in 1980s.

The BBS and Social Networks

With 70% of Chinese BBS sites built on Discuz!, Day is obviously a key figure behind the phenomenon. So we asked him why he thought BBS systems have become so popular in China. “The first Chinese BBS was probably set up back in 1997. Like Email, BBS is one of the first Internet services recognized by Chinese netizens,” he told us. “Chinese like the communities, they are normally a bit quiet in real life but in Internet they love to express their opinion and to follow up some discussion of hot topics. BBS provides a perfect and easy-to-setup show stage for everyone. BBS has evolved as a media platform, it is not the main stream media yet and might never be in China, but the latest and hottest news are always from various forums, spread and discussed by millions of users.

“Take a look at how fast the blog grows in China, you will understand my point here. The BBS users are more mature, they are mainly at the age of 20 to 40, well-educated and with various professional background, and their contribution to all sorts of forums make BBS a valuable information source.”

With social networking on the rise in the Western world and also in China, we asked Day if he thought social networking sites would eventually replace the BBS in Chinese culture.

“BBS will not be replaced by SNS and they will not be the competitors to each other either,” he answered. “BBS is a must-to-have application in SNS, at least in China. The features of BBS can help the social network users to exchange their ideas efficiently. On the other hand, SNS is a people-centric networking platform but BBS is a topic-centric platform. SNS is to map the social relationship in real life into the cyber space, which in my opinion is one of the reasons people love Facebook; But BBS is there for users to follow the hottest topics and expand your social experience virtually. In BBS, people go there because they are interested in the topics, and whom they communicate with does not really matter.”

The Monetization of BBS

The global social networking market is still struggling to seek the best methods for monetization, but it seems that BBS sites have already found a way to drive revenue. Day introduced us to his Insenz product, a BBS-based marketing service that was launched about six months ago. At its core, Insenz is basically a Chinese version of Google’s Adsense/AdWord services focused on BBS sites. If you are running a BBS focusing on the mobile phones market, for example, you can join the Insenz advertisement program and get mobile phone related ads or articles posted on your BBS.

Insenz’s customer are from all sorts of industries, car manufacturers, telecommunications, IT companies, etc. Insenz will monitor user feeback (e.g. how many replies to the article, how many times the post has been viewed, etc.) during the campaign and issue a report to marketers that includes valuable first-hand marketing information. The BBS sites that participate in the marketing campaigns get a cut of the revenue.

Of course Insenz takes the advantage of Day’s Discuz! kingdom. But actually, in China, Insenz is not the only company offering this service. Daqi.com, which started as a portal service, is now also taking advantage of the BBS phenomenon for marketing purposes. Instead of distributing ads across forums, they invented a technology to help gather and analyze discussions about the products of their customers. Daqi closed its second round fund from WI Harper in 2007.

Conclusion

A universal BBS search engine will definitely be more valuable than blog search in China, though Day said that he would not bother to do this simply because he thinks the search engine giants Google or Baidu have better technology to implement it. It seems that Google China has noticed the popularity of BBS sites in the Chinese Intneret market, and have recently taken a stake in Tianya.cn, a very popular BBS-based social network with 6+ million registered users and 200,000 online users daily. So should MySpace, Facebook, and other traditional Western social networks endeavor to enhance their BBS features if they want to play in China?

Been using Facebook for long ….see how its grown into a giant and where’s the traffic comin from ….

Facebook

Quick Analysis: The hot talked company Facebook has the highest growth rate, and at Forrester we predict it to achieve the same number of registered users as MySpace in Q4 of 2008, or early 2009 given the current growth rates. The widget platform, which launched summer 2007 has had strong growth as more than 13,000 applications have been launched. Please don’t call this the MySpace killer as each of these sites serves a different demographic, with a different purpose, and different tools. Facebook is more of a ‘lifestyle’ play that allows members to connect to each other.

General Growth
* More than 60 million active users
* An average of 250,000 new registrations per day since Jan. 2007
* An average of 3% weekly growth since Jan. 2007
* Active users doubling every 6 months

User Demographics
* Over 55,000 regional, work-related, collegiate, and high school networks
* More than half of Facebook users are outside of college
* The fastest growing demographic is those 25 years old and older
* Maintain 85 percent market share of 4-year U.S. universities

User Engagement
* Sixth-most trafficked site in the United States (comScore)
* More than 65 billion page views per month
* More than half of active users return daily
* People spend an average of 20 minutes on the site daily (comScore)

Applications
* No. 1 photo sharing application on the Web (comScore)
* Photo application draws more than twice as much traffic as the next three sites combined (comScore)
* More than 14 million photos uploaded daily
* More than 6 million active user groups on the site

International Growth
* Canada has the most users outside of the United States, with more than 7 million active users
* The U.K. is the third largest country with more than 7 million active users
* Remaining top 10 countries in order of active users (outside of the U.S., Canada and UK): Australia, Turkey, Sweden, Norway, South Africa, France, Hong Kong

Platform
* Over 7,000 applications have been built on Facebook Platform
* 100 new applications added per day
* More than 80% of Facebook members have used at least one application built on Facebook Platform


MySpaceQuick Analysis: MySpace the largest Social Network in North America maintains a dominant position as media site, primarily aimed at youth, giving them the opportunity to relate to brands and bands, as well as self-express. This site will continue to do with advertisers and marketers. Expect to see more TV and video networks to integrate and work with MySpace, who has the new generation that Generation X was to MTV.

Metrics
· MySpace has more than 110 million monthly active users
around the globe
· We are the country’s trafficked site on the Internet
· 85% of MySpace users are of voting age (18 or older)
· 1 in 4 Americans is on MySpace, in the UK it’s as common to
have a MySpace as it is to own a dog

·On average 300,000 new people sign up to MySpace every day,
this month we broke a record and had 4.5 billion page views to the
site in one day.

We are localized and translated in more than 20 international
territories: U.S., UK, Japan, Australia, France, Germany, Ireland, Italy,
Spain, Mexico, Canada, Netherlands, New Zealand, MySpace en
Espanol, Latin America, Austria, Sweden, Norway, Denmark and
Finland.

·MySpace is one of the fastest growing websites of all time,
we have:
·100 Billion rows of data
·14 Billion comments on the site
·20 Billion mails on the site total
·50 Million mails per day (more than Yahoo, Hotmail,
or Google)
·10 Billion friend relationships
·1.5 Billion images
·8 Million images being uploaded per day
·60,000 new videos being upload to MySpaceTV each day
·More than 8 million artists and bands on MySpace Music
Acts including Lily Allen, Sean Kingston, Arctic
Monkeys, Dane Cook discovered on the site by users

Company Details
·Launched in January 2004
·Acquired by Fox Interactive Media in October 2005
·Los Angeles-based
·Founded by Chris DeWolfe, CEO and Tom Anderson, President