One of the interesting principles we’re seeing with new digital companies are the new digital business models.
Most internet services we use are supported by advertising (Facebook, LinkedIn, Google). Media companies offer a range of digital business models from monthly subscription (e.g. Netflix), advertising funded (e.g. YouTube), both subscription and advertising (e.g. NOW TV) and freemium (e.g. Spotify).
The internet coined the term ‘as a Service’ (with the postfix ‘aaS’), which essentially rents shared platform ‘space’ or utilisation. These are usually available on a minimal-term contract of a month. One example here is Amazon’s hosting facility, AWS (Amazon Web Services) which offers hourly pricing, in a market which used to have annual contracts.
Linked to this are ‘marketplaces’ which combined large numbers of sellers and buyers. The biggest examples here are eBay, Alibaba, and Amazon. Apple App Store and Google Play fall into this category.
These marketplaces transformed into other offerings, such as what we now call crowdfunding (e.g. Kickstarter) and charity sponsorship (e.g. JustGiving).
Amazon probably has the most diverse range of digital business models, from a service platform (AWS, described above), to a marketplace (close to 50% of sales on Amazon are actually sold by third parties – not Amazon), to a global fulfilment operation (over 70% of third-party Amazon sellers use Amazon to ship their goods).
The Amazon fulfilment model is a game changer, only scalable via the internet’s success. It allows any seller to ship goods to an Amazon warehouse, and let Amazon send goods directly to customers. Sellers aren’t limited to their own geography, which makes selling goods in another country much simpler. And those goods don’t have to be sold on an Amazon website – it enables companies to sell from their own site or even via the phone.
Amazon has their own internal business model. Third party sellers must achieve high-quality service ratings or their accounts can be suspended. Uber uses a similar model – if a driver’s rating falls too low, they won’t be sent any customers. Both of these models demand high-quality service, but you can imagine the number of people who have bought a car to run an Uber service, or the number of businesses reliant on Amazon sales volumes and see their account suspended.
Future digital business models
A friend of mine recently bought a new component for his bicycle. Don’t worry too much about the part itself (if you’re wondering, it’s a power meter – there’s a link at the end of the article), except to say that it cost a third of the price of competitive products (£300 compared to £1,000). There’s also a mandatory monthly subscription (called a maintenance fee) to use the product (under £4 per month). What’s interesting is that if you don’t use the product and send the company your usage data for a calendar month, the monthly subscription fee doubles in cost until you start using it again. Customers can also buy a contract exit-fee.
This type of digital business model may transform other services too.
One of my favourite and unobvious digital business models is from Snapchat. Snapchat is valued on the number of daily active users – literally, the number of users who use the service every day. Snapchat cleverly created a feature to encourage users to use the app every day – called a Streak. A streak is when a user sends a Snap (a picture or video) to another user and the recipient replies within 24 hours. When either side fails to reply, the streak ends.
Snap, the company that owns Snapchat, is worth around $16bn. This valuation is directly linked to the number of daily active users, which is the valuable commodity for advertisers, how Snap earns its income.
Combining Snap and the bicycle component’s digital business models: companies which have such high valuations may start charging based on low or non-usage.
Future generations will look back at the first few years of the internet and ask us whether we were suspicious that everything was free. “You could do unlimited searches for anything on the Internet, for free?” “You could use the largest encyclopedia of all time, for free?” “You could store unlimited photos, work on unlimited documents and spreadsheets, for free?” “You could use maps, anywhere in the World, and find driving directions between any two points, for free?”
We’ll simply answer “Yes.”
It’s possible that some of the internet companies which offer such as broad range of services, for free, will respond to non-usage by asking for a fee.
These companies will say “You’re storing all this data with us and have stopped using our services, which means we’re carrying a cost and not getting any advertising income.”
Amazon marketplace and fulfilment stats from http://fortune.com/2017/01/04/amazon-marketplace-sales/
The bicycle component is a power meter from Team ZWatt. See https://shop.teamzwatt.com/product-category/maintenance-fees/ for the various maintenance fees.
More about Snap streaks: https://support.snapchat.com/en-GB/a/Snaps-snapstreak