Insights - Deciphering Digital Business Models.

Deciphering Digital Business Models.

by Dr. Thomas Papanikolaou on May 24, 2016

Have you ever wondered why Facebook paid $19 billion to buy WhatsApp ? What value Microsoft saw in the $8.5 billion take-over of Skype ? Why Google continuously launches new service propositions in markets that seem so far away from its core business? And why the European Commission thinks (rightly or wrongly) this practice is in the case of Android anti-competitive ? In this overview article we will explain the mechanics of digital business models and how companies use them to cross user segments and industry borders to create unfair business advantage.

CREATING UNFAIR DIGITAL ADVANTAGE

In the digital space, every product / service created has a complementary product. Such complements are consumed within products, however products and their complements do not have to reside in the same industry. For example, electricity (utility) is a complementary product to digital devices (device manufacturing). Internet connectivity (telecoms) is a complementary product to Facebook (advertising) and Skype (telecoms). As the examples show, such complementary products are more than simple accessories: they are essential.

This close relationship between products and their complements goes even further: whenever the price of a complement decreases, the demand for the product increases. The opposite is also true: whenever the price of a complement increases, the demand for the product decreases. For example, due to connectivity costs (still as of 2016), people use their devices and data services less when they travel abroad / they are roaming.

In a traditional ecosystem, there is a balance between products and their complements and every participant is earning a fair share of the revenue generated. This balance, however, can is distorted when one of the ecosystem participants starts controlling the price of complementary products, "starving out" another participant, and transferring the revenues and even customers from that participant to itself. Such an action creates asymmetry in the revenue distribution and, thus, unfair advantage.

CASE 1: AMAZON E-COMMERCE

Amazon's Business Model can be regarded as the first example of an asymmetric business model, exhibiting three (3) fundamental ingredients.

CREATE VALUE IN A NEW INDUSTRY to
ACQUIRE & TRANSFER CUSTOMERS and
CAPTURE PROFITS IN OWN BUSINESS

Amazon pioneered crowed-source recommendations for books (and later for all products sold through its e-commerce platform). These recommendations were perceived as trustworthy, offering a new way to choose books / products. Amazon also offered online a much larger catalogue than any physical store could, increasing the chances for customer to find the product they wanted.

By avoiding the retail store running costs, using the internet to drive logistics, and mass-scale purchasing, Amazon was able to offer - most of the time - the lowest possible price. This ensured that even those customers who had visited a physical store - to touch and feel a product - would return to Amazon to buy it.

Amazon would capture revenues of large scale product sales within its e-commerce platform.

It is worthwhile noting that since its original inception, Amazon performed further asymmetric steps e.g. launching the Fire tablets at product cost (value creation and customer acquisition) together with its own app store (customer transfer) to capture more revenue on its e-commerce business model.

CASE 2: GOOGLE ANDROID

Google Android is a further, more advanced, example of an asymmetric business model in action.

CREATE VALUE IN A NEW INDUSTRY to
ACQUIRE & TRANSFER CUSTOMERS and
CAPTURE PROFITS IN OWN BUSINESS

By creating Android and offering it for "free" to OEMs Google created value in the device industry, commoditising along the way the value of Symbian, the prices of mobile phones, and accelerating the demise of many companies including Nokia.

Google bundled Google Apps with Android, ensuring that every owner of an Android phone became instantly a customer in Google's Advertising Business Model. It is this bundling that the European Commission regards as anti-competitive

Google monetises user data knowledge in its advertising operations.

Since Android, Google has performed further asymmetric moves in multiple industries.

CASE N: WHATSAPP, SKYPE, AND MANY MORE

With the above structure, it is now easier to answer why Facebook (advertising) bought WhatsApp (telecoms), Microsoft (software) acquired Skype (telecoms), and why many other companies are growing asymmetrically into new industries.

IN SUMMARY

Digital Business Models are inherently asymmetric i.e. by design they force customers and profits to migrate from one industry to the other. They create unfair advantage by commoditising another industry and are thus prone to anti-competitive actions. Deciphering the mechanics of the such Asymmetric Business Models is the first step to attaining clarity on the moves of players such as Google, Facebook, Microsoft and how those could affect the industry your business operates in.

CREDITS & REFERENCES

Asymmetry has been used in conjunction with business modeling since the appearance of Amazon. For us though, it is the people at VisionMobile who first provided a concise description. We use their terminology as a basis for our work with clients and we highly recommend reading their excellent blog on the subject.

For the avoidance of doubt, Neos Chronos are not affiliated with, and have no financial interest in any of the companies mentioned in this article. All names and trademarks mentioned herein are the property of their respective owners. Please observe the Neos Chronos Terms of Use.

  1. Wikipedia: Complementary Good, Ecosystem
  2. Microsoft: Skype Acquisition
  3. Facebook: WhatsApp Acquisition
  4. Google: European Commission Antitrust motion
  5. VisionMobile: Asymmetric Business Models

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