business models in consumer technology
TRANSCRIPT
Jan Dawson Chief Analyst
(408) 744-6244 [email protected]
@jandawson
Business models in consumer technology
About this deck• This deck is a shortened and simplified version of a longer deck that I present in
person to consumer technology companies and others
• It is based on the work and analysis I do at Jackdaw Research in advising major consumer technology companies, some of which I share through:
• My personal blog: www.beyonddevic.es
• My Techpinions columns: https://techpinions.com/author/jandawson
• I’m open to presenting the longer deck in person for a fee – please contact me for pricing (contact details on the title slide)
• You may embed and download this deck as you wish, but please attribute it to Jan Dawson, Chief Analyst at Jackdaw Research and link to www.jackdawresearch.com
Key ideas• Successful consumer technology companies increasingly share these
characteristics:
• A highly profitable core business
• Competition across several key domains and the creation of ecosystems
• Successful use of monetized and non-monetized business models to create value across domains
• Despite all this, it is possible for small, focused consumer technology companies to be successful, though the pull of ecosystem creation is strong over time
• Major companies have created profitable cores around very different markets
Six major domains in consumer technology
Content Comms ConnectivitySoftwareHardware
Smartphone
Tablet/PC
Console
Smart TV/STB
Wearables
Operating system
Productivity
Anti virus
Mobile apps
Other
Video
Music
Books
Search
Games
Text
Audio
Video
Social
Photo sharing
Wired
Cellular
WiFi
Satellite
Digital layer
Commerce
Payments
Transport
Hotels
HomeOther
Category definitions• Hardware: the smart devices we use to make use of the rest of the categories
• Software: operating systems, pre-installed and installable software that runs on smart devices
• Content: the digital content consumers create and consume on their devices
• Communications: the ways in which consumers communicate on their devices
• Connectivity: the wired and wireless connections that allow devices to engage in the other categories
• Digital layer: products and services which add a digital layer to real-world products and services, whether commerce, transportation or payments
The importance of highly profitable core businesses
• Successful major consumer technology companies need highly profitable core businesses, for two reasons:
• These allow the company to invest in its ecosystem by providing other products and services on a non-monetized (or simply lower margin) basis while maintaining good overall margins
• They allow the company flexibility to innovate and invest in new businesses while maintaining good overall margins
• Companies which lack a highly profitable core are unable to create viable ecosystems and to invest without damaging profitability
Examples of profitable coresHighly profitable
coreLower margin
activitiesSubsidized
activities
Apple Hardware, especially the iPhone
Other hardware, iTunes, iCloud
OS X, iOS, iWork, iLife, iMessage
Carriers Voice, SMS Data Devices, voicemail, directories
Facebook Display ads in news feed Other ad products Messenger, Instagram,
Whatsapp, Oculus
Google Search advertising Display advertising Google Docs, Gmail, Hangouts, Android
Microsoft Office, Windows Cloud, Lumia, Xbox, Surface, Bing
OneNote, Windows Phone, Cortana
Cores are different for different companies
• Even though each company needs a highly profitable core, the core doesn’t need to be in the same area
• Different major tech companies have established hardware, software, content, communications and connectivity as their cores
• All have also diversified beyond those cores
Expanding from coreHardware Software Connectivity Comms Content
Apple
Microsoft
Digital layer
Amazon
Amazon – odd man outRetailer gross margins, annual
10%
20%
30%
40%
2006 2007 2008 2009 2010 2011 2012 2013
Amazon Wal-Mart Target KrogerCostco Home Depot Walgreen Amazon’s core is e-commerce -
essentially retail. But this is an inherently low-margin business. Amazon’s gross margins have risen lately, but only because of non-retail activities like third-party sellers and AWS. Amazon’s core simply isn’t highly profitable, which is why recent investments and experiments (such as Fire Phone) have hurt its overall profitability so badly.
Two basic categories of business models
• The business models for every consumer tech company’s products and services may be divided into two broad categories:
• Those where the product or service is directly monetized
• Those where no revenue is generated from the product or service directly
• Each of these two categories may be further subdivided as shown on the next two slides
Monetization modelsDirect Platform Advertising
Definition Sell 1st party products to end users
Sell 3rd party products to end users
Sell eyeballs to advertisers
User Customer Alignment
100% 50/50 0%
Amazon Kindles E-commerce IMDB
Apple iPhone, iPad, Mac iTunes, App Stores iTunes Radio
Facebook – Payments Core product
Google Google Business Apps Google Play Search
Microsoft Office Windows Store Bing
Two flavors of direct monetization
• Even within the direct monetization model, there are two distinct charging mechanisms:
• One-off, where a customer makes either single or infrequent purchases for ownership of a product
• Subscription, where a customer pays a fee on a regular basis (typically annual or monthly) to rent a product or service (or access to it)
• Across consumer technology, subscription models are taking over as both customers and providers gravitate towards them
The move to subscription business models
Old Models: One-off
New Models: Subscriptions
SoftwareLicence purchases, made every few years, e.g. Windows, Office,
Photoshop
Software-as-a-service, e.g. Office 365, Adobe Creative Cloud, Evernote Premium
Devices Subsidized or in-full purchases of phones, tablets etc.
Devices purchased on installment plans through
carriers (or potentially OEMs)
Content Album, TV show or movie purchases
Subscription services such as Netflix, Hulu, Spotify
Non-monetized modelsBundling Data Channel
DefinitionPart of a broader product / service
which is monetized
Generates data which is used to improve
products or sell ads
Provides ways to get monetized products in
front of end users
User Customer Alignment
100% 50/50 0%
Amazon Prime Instant Video Goodreads –
Apple OS, iLife, iWork – –
Facebook Messenger Graph Search Facebook Home
Google Hangouts Google Maps Android
Microsoft Internet Explorer Cortana Windows Phone
What is becoming pervasively non-monetized?
Monetized Non-monetized
Cloud storage Dropbox, Box OneDrive, Google Drive, iCloud Drive
Messaging Carriers iMessage, Hangouts, Skype, Whatsapp
Operating systems Windows Chrome OS, Android, iOS, OS X
Productivity software Office iWork, Google Docs
Photo sharing Flickr iPhoto, iCloud Photo Streams, Google+
The companies in the Monetized column need to provide increasingly strong differentiation to justify charging or shift to other business models
User/customer alignment• Different business models have different degrees of
alignment between users and customers
• Direct business models and bundling have fairly complete alignment between customers and users: they are one and the same
• But advertising business models often put users and the paying customers (advertisers) and their needs in conflict
• Platform, Channel and Data business models can also create tension between the needs of users and others
Where does the money come from?
Revenue split by business model, last four quarters
0%
25%
50%
75%
100%
Amazon Apple Facebook Google Microsoft
Direct Platform Advertising
Business model map: GoogleMonetized Non-monetized
Direct Platform Advertising Bundling Data ChannelGoogle AppsNexus devices
ChromecastDrive
Play StoreSearchGmailMaps
YouTubeCalendarAndroid
Android WearAndroid Auto
Note: The longer version of this presentation includes similar maps for other companies
Is software eating the world?• Marc Andreessen famously said software is eating the
world, and in a sense that’s true
• More and more things are delivered through software rather than dedicated hardware
• However, almost all of that software is monetized through things other than software – whether hardware, associated services or advertising
• Almost all the “software” being directly monetized on app stores is made up of games
Software eating the world but being monetized elsewhere
Monetization
Instagram In-app advertising
Office Office 365 subscriptions
Netflix Netflix subscription
Uber Car rides
AirBnb AirBnb accommodations
LinkedIn Recruitment and advertising fees
Pandora Ads and subscriptions
Skype Ads and subscriptions
Where’s the revenue?Content $650bn
Comms $1.2tn
Connectivity $400bn
Software $100bn
Hardware $800bn-$1tn
Smartphones $200bn
Tablet/PC $400bn
Consoles $10bn
Smart TV/STB $150bn
Wearables <$10bn
OS $20bn
Mobile apps $30bn
Productivity $30bn
Anti-virus $5bn
Other $5bn
Video $500bn
Music $9bn
Books $9bn
Search $60bn
Games $20bn
Text $170bn
Audio $930bn
Video <$10bn
Social $20bn
Photo sharing <$10bn
Wired $200bn
Cellular $180bn
WiFi <$10bn
Other
Digital layer $1.5 trillion
Commerce $1.4tr
Payments ~$1bn
Transport <$5bn
Hotels <$1bn
Home <$5bn
Satellite <$10 bn
Note: These numbers are intended to be ballpark only – I have more detailed breakdowns
Where’s the margin?Content Comms Connectivity Software Hardware
Smartphones <5%
Tablet/PC <5%
Consoles <5%
Smart TV/STB <5%
Wearables <5%
OS 30% or n/a
Mobile apps very variable
Productivity 30% or n/a
Anti-virus 10-15%
Other –
Video 20-30%
Music 10%
Books 10%
Search 5-25%
Games 5-20%
Text 30-40%
Audio 30-40%
Video <10%
Social 20-30%
Photo sharing 10%
Wired 20%
Cellular 30%
WiFi 10%
Other –
Digital layer
Commerce 10%
Payments 5%
Transport ?
Hotels ?
Home <5%
Satellite 20%
Note: These numbers are intended to be ballpark only – I have more detailed breakdowns
Where the money is
Scale
$1.5 trillion
$1 trillion
$500 billion
Operating margins
0% 10% 20% 30%
Hardware
Software
Content
Comms
Connectivity
Digital layer
Note: the dimension not shown here is future changes in both size and profitability
Consumer Electronics marginsOperating margins for various consumer electronics businesses
-40%-35%-30%-25%-20%-15%-10%
-5%0%5%
10%15%20%25%30%35%40%
Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014
A word on ecosystems• Most of the major consumer technology companies have
built or are building ecosystems
• Ecosystems provide value across domains, devices and potentially platforms
• They create true synergies – buying into the ecosystem is better than buying into the sum of its parts because things work better together
• This means competing across domains, and recognizing erstwhile partners as potential competitors
Competing across the six categories
Hardware Software Content Comms Connectivity Digital Layer
Amazon Kindle, Fire Phone, TV Fire OS Instant Video,
MP3, Kindle – AT&T 3G/4G in devices
E-Commerce Payments
Apple iPhone, iPad, Mac, Watch
OS X, iOS, iLife, iWork
iTunes, App Stores
iMessage, FaceTime – Payments
HomeKit
Facebook Oculus, HTC First Parse
Auto-play videos, photos
Messenger, Whatsapp Internet.org Payments
Google Motorola, Nexus
Android, Chrome OS
Play Store, YouTube
Hangouts, Google Voice Google Loon Google
Shopping
Microsoft Surface, Lumia, Xbox
Windows, Office
Windows Store, Xbox Skype – –
Competition across four domains in hardware
Competition across four domains
Microsoft Google Apple
Computing Windows Phone Windows 8
Android Chrome OS
iOS OS X
Body Band Health
Android Wear Fit
HealthKit Apple Watch
Car Windows Embedded? Android Auto CarPlay
Home Xbox Insteon
Nest Android TV
HomeKit Apple TV
How big is your ecosystem?User numbers, billions
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Q3 2008 Q2 2009 Q1 2010 Q4 2010 Q3 2011 Q2 2012 Q1 2013 Q4 2013 Q3 2014
Facebook monthly active usersAmazon active customer accountsTwitter monthly active usersiOS installed baseAndroid installed base
The pull of ecosystems• There are obviously successful single-product
companies out there today
• But in order to continue to grow, they inevitably expand into adjacent markets
• This then causes them to compete with former partners, and they end up building category, rather than product, companies and eventually ecosystems
The pull of ecosystemsContent Comms ConnectivitySoftwareHardware
Smartphone
Tablet/PC
Console
Smart TV/STB
Wearables
Operating system
Productivity
Anti virus
Mobile apps
Other
Video
Music
Books
Search
Games
Text
Audio
Video
Social
Photo sharing
Wired
Cellular
WiFi
Satellite
Digital layer
Commerce
Payments
Transport
Hotels
HomeOther
Text
Audio
Video
Payments
Video
Music
Photo sharing
Apple’s slow transformation into an ecosystem
Tablet/PC
Operating system
Productivity
Smartphone
Smart TV/STB
Books
Search
Home
Mobile apps
Other
1
2
3 4
56
7
8
9
10
11
12
13
14
15
16
1 These numbers denote the rough order in which Apple has expanded into these areas
Key takeaways• Successful consumer tech companies build
ecosystems around highly profitable cores
• This means competing across multiple categories and domains to remain successful
• Software may be eating the world, but it’s monetized through other categories
• There are only a few highly profitable niches out there, and much else will become free to the user
