Tag: two-sided business models

Cloud 2.0: Telco Strategies in the Cloud

Will Telcos be left behind?

Introduction

Cloud services are emerging as a key strategic imperative for Telcos as revenues from traditional services such as voice, messaging and data come under attack from Over The Top Players, regulators and other Telcos. A majority of these new products are delivered from the Cloud on a “pay for consumption” basis and many business customers are increasingly looking to migrate from traditional in house IT systems to Cloud-based or virtualized services to reduce costs, increase agility and decrease deployment times. Gartner recently estimated that the Cloud services market would be worth over $200 billion by 2016, roughly double the value of 2012 and with a CAGR of around 17% whereas traditional IT products and services will see just 3% growth.

It is clear that some Telcos have gained a greater understanding of the Cloud market, and are acting on that understanding, offering increasingly rich Cloud-based products and services, paving the way for Cloud 2.0. But for most Telcos, Cloud services remain secondary to their core business of voice and data delivery. Telcos are wrestling with issues of reduced margin on Cloud and how to stay relevant to their business customers.

This report looks at the development of the Cloud market providing clarity around the different types of cloud products and the impact that they have on business users. Cloud value propositions are examined along with criticisms of cloud products and services. We show that the current risks for Cloud customers represent an opportunity for Telcos and Cloud vendors because….

The report also looks at the development of Cloud 2.0 – a second generation or a more ‘intelligent’ evolution of Cloud products and services. Cloud 2.0 offers key additional benefits/capabilities to consumers, vendors, businesses and Telco/Service providers. These can be typified by cost reductions in the delivery and consumption of cloud services through working with scale players to provide basic compute services, ease of acquisition and most importantly the ability to deliver “mash-up” products and services by using API’s to provide integration between cloud services and products and Telco/service provider products such as Bandwidth, Voice, Management, Support and Billing. Cloud 2.0 is gaining rapid momentum and we show how there is still time for Telcos to play a key role in Cloud 2.0.

Who should read this report?

The report is a ‘must-have’ for all strategy decision makers, Cloud specialists and influencers across the TMT (Telecoms, Media and Technology) sector; in particular, CxOs, strategists, technologists, marketers, product managers, and legal and regulatory leaders in telecoms operators, vendors, consultants, and analyst companies. It will also be invaluable to those managing or considering medium to long-term investment specifically in Telco Cloud services, but also more broadly those involved within telecoms and adjacent industries, and to regulators and legislators.

Contents

Executive Summary

Introduction

  • What is Cloud?
  • What is the Cloud Value Proposition?
  • Types of Cloud
  • Key criticisms of the Cloud
  • What is ‘Cloud 2.0’ and why does it matter?
    • Enterprise vs Consumer cloud, Fit with Telco 2.0 strategies

Market Structure & Opportunity

  • What is the shape and size of the market (revenues and profit)?
    • Total size, definitions of SaaS, PaaS, IaaS, VPC + forecasts
    • Advantages and limitations of XaaS definitions
  • What are the key customer segments and their needs?
    • SMBs vs Enterprise
    • Early adopters vs mass adopters
  • What is the opportunity for Telcos (market size and revenues)?
    • Share forecasts / ranges for Telcos
  • What are the most relevant cloud services for Telcos?
  • What are the key barriers?
    • Overall and by segment
  • Future Scenarios
  • What is the competitive landscape and who are the key players in Cloud Services?
    • Detailed competitor analysis, groupings by type and strategy Strategy review: Analysis of 6-10 key players, covering
      • Objectives, strategy, areas addressed, target customers, proposition strategy, routes to market, operational approach, buy / build partner approach
    • Key strategies of other players
    • Role of the network / operators to Vendor/partner strategies

Telco Strategies

  • Which strategies are Telcos adopting and what else could they do
    • Review of Telco attitudes and approaches based on following analysis
    • Grouping of Telcos by approach (if valid)
  • Which are the leading Telcos and what are they doing?
    • Case studies on 6-10 leading Telcos, covering:
      • Objectives, strategy, areas addressed, target customers, proposition strategy, routes to market, operational approach, buy / build partner approach
  • Outlines of 10 additional Telco strategies
  • What relationships should Telcos establish with other ecosystem players?

Conclusions and recommendations

 

Full Article: QQ: China’s Monster ‘Facebook’ – on a screen near you soon

Summary: An analysis of QQ.com – a profitable Chinese social networking and instant messaging service with 1 billion usernames, 75 million peak concurrent users, and plans to grow beyond China.

Introduction

The world is full of fast-growing, hyper-fashionable social networking and user-generated content plays. Almost to a man, they lack one thing – profits, or even revenues. An English-speaking technology media and analyst/investor community obsessed by the US West Coast has practically ignored QQ.com, one example of spectacular success, because it’s Chinese.

A Profitable and Valuable Social Network

At the 30th of June, Tencent (QQ’s owners) had thrown off RMB993 million (US$145 million) in free cash in six months, even after spending RMB1.9bn in CAPEX and a further RMB593 million in financing costs. For comparison, Facebook went marginally cashflow positive for the first time in August and isn’t yet profitable.

The bottom line is impressive too; at the last count, Tencent’s gross margin was at 67.3% and net margin was 41.75% – this smashes HP’s investment criterion of “fascinating margins”, i.e. 45% gross, and Iliad’s 70% ROI on new fibre deployment. We previously estimated the gross margin for October 2008 as 63.5%, so it appears that things have consistently been going well for QQ.

The shares (listed in Hong Kong) have gone from HK$60 to 120 since April, showing that this performance is also attracting plenty of demand from investors – albeit at a somewhat toppy price/earnings ratio of over 50.

Nearly a Billion ‘Users’

There were 990 million user identities on QQ as at the 30th of June, 2009. Given the current growth rate, the billionth user will almost certainly be announced in the next quarterly results – but a nontrivial percentage of these are inactive, are multiple aliases, or are spambots. [NB. This is true of all IM communities except, perhaps, for the 17 million users of IBM Lotus Notes Sametime inside their enterprise firewalls, as we pointed out in the Consumer Voice & Messaging 2.0 strategy report.]

As impressive as this is, instant messaging user bases are usually only weakly bound to the service, they are usually non-paying, and many people have multiple usernames. A more useful metric is peak concurrent users – the maximum number of users simultaneously logged in during the period in question. To be counted, a user name has to be active in that they are online, so it’s reasonable to deduce that they exist. It doesn’t prove that they are a human being (or for that matter a useful application rather than a pest); however, whether or not a logged-in user is human, they are consuming system resources.

So, measuring peak concurrent users provides us both with better data on uptake and a more useful indicator of capacity related costs. It’s a standard telecommunications engineering principle to “provision for the peak” – that is to say, it’s useless to build a network with only sufficient capacity for the average traffic, as 50% of the time it will be congested and probably non-functional through overload. To be available, the system must supply enough spare capacity to handle the peaks in demand. Peak load determines scale, and hence cost.

In 2008, at various times, QQ’s parent company Tencent claimed to have between 355 and 570 million users. At the end of June, 2009, the user count stood at 990 million – so the nominal user base had roughly doubled. In 2008, peak concurrent users were 45.3 million, growing to 65 million in June 2009. According to QQ.com’s live statistics readout (you can watch it grow in real time here), the record at time of writing was 79 million. According to Alexa, 3.26% of global Web users visited one of the various qq.com sites in September 2009.

qq-growth.png

For comparison, Skype’s all-time peak concurrent user count is 15 million, although it has the advantage of using user-provided infrastructure, whereas QQ has a client-server architecture and therefore a constant need for rack-space.

Not just users, but Paying Users

In 2007, out of 12 million peak concurrent users, 7.3 million had spent money with QQ, or to put it another way, 61% of verifiable QQ users were buying value-added services. (How many mobile operators can claim that?)

In March, 2009, we thought it unlikely that this high proportion would continue to pay as the service grew – and that it was quite possible that the 7.3 million earlier payers were dominated by early adopters and power users, so that future recruits would be less committed to the community, less geeky, and lower-income.

However, when Tencent’s Q1 results appeared at the end of March, 36.9 million users had purchased value-added services during the quarter, growing at a monthly rate of 8.4% to reach 40 million by the end of June. This latter figure was against a concurrent user base of 65 million, meaning that 62% of concurrent users were paying users.

We think this is an impressively high proportion at such volumes, and suggests that the revenue may scale reasonably well as it grows penetration further. As one might expect the cost model of such a volume business to scale efficiently, this implies further prospects of profitability. It is likely that such thoughts are one of the influences on the aforementioned growth in QQ’s share valuation.

So, how did they do it?

 

qq-cpf.png

In our Serving the Digital Generation Strategy Report, we identified a list of key factors that anyone who wants to attract the customer of the future would have to address, which together describe what we call the participation imperative. Specifically, four axes define the customer’s aims:

  1. To interact socially with a peer group
  2. To personalise and customise their environment
  3. To express creativity – e.g. user generated content
  4. To maintain privacy/anonymity or seek notoriety

These require and depend upon four key affordances:

  1. Portability – broad ability to work across multiple PCs, mobiles
  2. Payments – virtual currencies, transactions
  3. Feedback – ratings, comments, discussion, personalisation, hackable APIs
  4. A directory – to find other people

We assess that QQ hits 7 out of 8 criteria squarely. Really, the only one they don’t cover is privacy – although they do have rich presence-and-availability control, it’s in the nature of such a community that going offline could be a noticeable act, and there have been problems with the Public Security Bureau (Chinese secret police).

NB. The Customer of the Future can be a complex and powerful character. When the Shanghai PSB demanded that QQ filter references to the Diayou islands (a controversial nationalist cause in China), the ensuing user revolt caused even the PSB to back off.]

QQ caters to user creativity and the need for personalisation much more deeply than most social networks with the possible exception of Facebook. Although officially proprietary, the system API is documented and QQ, the company, positively encourages a hacker ecosystem of interesting new applications. This goes some way beyond the skins and avatars most socnets offer. Similarly, you can’t offer more effective feedback to more advanced users than the ability to tinker with the works. Portability is well catered for – there are multiple client applications, SMS integration, various mobile clients, and the Web site.

Print your own Digital Money

QQ’s in-world digital currency is no trivial add-on. QQ derives revenue from selling applications, other in-game goods, and extra services such as a blog, games, and a streaming music service, in return for its internal digital currency. This market creates a sink for the digital currency, and therefore gives it value, which creates a further demand for it as a gift and reputation good. It shares revenue from the store with the creators of in-game goods, thus feeding user creativity.

In Telco 2.0 terms, QQ’s business model is collecting money from the downstream side and subsidising the upstream partners, in order to encourage the creation of saleable goods and the purchase of digital currency. In return for their participation, users get the core functions of the directory and the messaging layer to service their peer group and burnish their on-line identity.

In-World Currency dwarfs Advertising

Although QQ also does contextual advertising, its core business is the in-world economy. We remarked back in March that the ad business was overshadowed by the VAS business, and this is even more true now. Online advertising grew just under 10% year-on-year, but now makes up just 9% of total revenues, falling from 11%. Internet VAS revenues were up 107% and mobile VAS was up 38%.

In part, this is the unavoidable downside of being hackable; advertising is a tax on your attention, so some people will want to be rid of it. Just as many Mozilla Firefox users install Adblock Plus to screen out Web advertising, multiple unofficial QQ clients exist that strip the ads. But if the users buy the clients from the QQ Store, who’s complaining?

QQ’s ‘Two-Sided’ Business Model Strategy

We’ve identified three types of generic ‘two-sided’ business model strategy, and concluded that the most successful companies were those who operated at the creative edge between each type.

  • Strategy One involves giving away services before and after a transaction, and collecting a percentage of the transaction. Think Amazon – or a casino.
  • Strategy Two involves giving something away to create a trading hub, then selling something to the crowd. Think of the original Lloyds’ Coffee House – it didn’t write marine insurance itself, it sold coffee to the insurance brokers, who came for the liquidity and rumours, and stayed for the coffee.
  • Strategy Three involves selling access for third parties to the trading hub – like BAA plc renting shops at Heathrow Airport, or Google giving away a whole range of services in order to create inventory it can sell adverts next to.

QQ would initially appear to straddle Strategies Two (selling to the crowd) and Three (charging for access) in the two-sided business model. But the domination of in-world trade over advertising in its P&L statement suggests something else – much of what it sells to the crowd originates in the crowd. Isn’t this an example of the Amazon-like Strategy One, facilitating transactions in return for a turn on the deal? If so, they’ve brought off the impressive feat of exploiting creative ambiguity between all three.

Next: your market?

Where does QQ go from here? The answer appears to be “right here” – in August 2009, Tencent launched an English-language portal (imqq.com). Interestingly, the site is marketed directly at business, which is an extension of a strategy shift they have already undertaken in China. For some time, Tencent has been marketing a version of the client at business users which borrows the look-and-feel of Microsoft Live Messenger (apparently being boring can be a valid strategy).

The business version of QQ is paid for – sensibly in our view, Tencent don’t expect small companies to be spending much time trying to achieve legendary status in the QQ user community. As (supposed) serious, responsible adults, they’re meant to have a secure identity and reputation already, so they’re not likely to contribute that much to the in-world economy by trying to burnish them. Therefore, a traditional, one-sided model is being used to derive revenue from this submarket.

Conclusion: Watch with Care

Our conclusion is at this stage that the Telcos who aren’t yet familiar with QQ should keep a close watch on them in both home and away markets. At a minimum there’s a lot to be learned from how this smart and complex operator employs the ‘two-sided’ business models. At other extremes are competitor threat and partner opportunity scenarios that we’ll be looking at in more depth in our future analysis.

Even though there are a lot of mobile industry execs with scars from trying to transplant successes from (usually) Japan into WENA (Western Europe & North American) markets, complacency would be extremely unwise faced with a potential competitor that has demonstrated such a deft grasp of two-sided business models, such a close understanding of user needs, and such a solid base of competence in high scalability Internet engineering.

And Finally…

Bill Gates recently gave a speech in which he claimed that two out of the five most profitable firms in China “don’t pay for their software”. He was telling the truth, in a sense; a quick “curl -i im.qq.com” demonstrates that Tencent isn’t paying a penny for its server software – the site is served with Apache running on BSD Unix machines. That may not be what Bill meant, but perhaps he should have.

Full Article: M-Banking: can Zain’s new business model for ZAP rival M-PESA?

One of the major successes of the mobile industry in recent years has been the growth of m-banking in the developing world. Although a considerable number of well-funded, vendor- and operator-backed efforts to deploy m-payments systems in Europe have failed, m-banking succeeded in Africa and Asia – largely because it catered to needs that the rest of the financial system simply didn’t supply. Now, a major emerging market operator, Zain, has entered the game with a radically different business model.

Another driver of success was that the developers of M-PESA and other systems observed that the airtime credit transfer features built into their prepaid OSS solutions were being used by their subscribers as a crude money transfer system; rather than prescribing a solution, they built on user creativity. Telco 2.0 is interested in this not only because this form of development is profoundly Telco 2.0, but also because m-banking is the ultimate example of the opportunities that appear where there is a large and positive difference between the quantity of data transferred, and its social value.

By far the best-known systems are M-PESA, developed in-house by Safaricom in Kenya and now deployed in several other countries, and Smart Telecom in the Philippines. However, as you’d expect, the success of these has attracted imitators and competitors as well as emulators. If you’d asked most people in the industry which operator was likely to reach the market first with such a product, they would probably have said Celtel, the hugely respected emerging market GSM specialists founded by Mo Ibrahim. After all, by 2006 they’d already integrated their East African HLRs, ending roaming charges in the area and permitting cross-border credit transfer, a single currency of sorts.

Well, Celtel was sold to Kuwait’s MTC not long after that, changing its name to Zain. Mo Ibrahim took his money and began offering African presidents a bonus for retiring peacefully. Now, however, Zain has moved into the mobile money business. It is certain that this will be an important moment in its development; Zain’s sheer scale makes that certain. The initial deployment covers some 100 million subscribers. This also means that some markets now have competing mobile payments services – Tanzania, for example, has Zain’s ZAP and two competing M-PESA deployments. This is probably going to teach us a lot about this business in the next few months.

Cash: the crucial application in cashless payments systems

The killer application for mobile payments is cash. This is one of the reasons projects like Simpay failed; rather than extending the existing financial system they tried to leap directly to a cashless system. Network effects are vital to understanding this; if the money in the system can’t be converted into cash, the whole system is afflicted by a first-fax problem as no-one is likely to accept payment from it. It’s therefore crucial that it deals with cash.

Cash is also the form of payment that mobile banking systems compete with. This is another reason why the successes were in cash or pre-cash economies, rather than in Western Europe – most people where Simpay was trialled have access to modern banking and ATMs readily distribute cash for all and sundry. Handling cash is always expensive and risky, whereever in the world you are; it is frequently stolen or embezzled, it needs guarding. These problems are much aggravated if there is no effective policing. Hence, in large parts of the world, people are excluded from the ability to save (or to borrow), and are reliant on expensive and frequently risky informal transfer networks.

Mobile operators were able to step into the breach because the development of PAYG (Pay As You Go) service had created an alternative, lightweight financial infrastructure, consisting of real-time OSS solutions in the network and an extended user interface, made up of various tokens (vouchers, SMS transfers) and a network of micro-entrepreneurs who sell them. The business process here essentially provides a way of authenticating to the OSS that the user presenting a voucher code has indeed paid cash to acquire a given number of minutes of use, and then recovering cash into the operator through a wholesale business relationship with the vendors. There is really very little difference between this and the corresponding process of ingesting cash into a mobile payments system – which the subscribers were quick to understand and repurpose the airtime-selling network accordingly.

But as the invaluable Valuable Bits blog points out, there is one big difference between informal airtime credit transfer and formal m-banking; transaction cost. You can be confident of getting the minutes of use you pay for, but what happens when it comes to converting them back into cash? Well, you don’t know. Valuable Bits estimates that the transaction cost ranges between 5 and 40 – 40! – per cent of the transaction, a figure that makes even Western Union’s margins look modest. And worse, it’s not a risk but an uncertainty. This form of money varies in value between people and between markets, and also in time. The canonical purposes of money are as a means of exchange, a store of value, and a unit of account – stability is crucial for all of these.

Trusted agent networks are decisive

So, it’s crucial to build a network of agents who are trusted by both the network and the public, so that the system can both accept cash and pay it back out. The golden rule of cellular has always been that superior coverage wins. If you’re already selling airtime this way, you’ve got an advantage; and in fact, there is an earlier alternative system that works this way. In some places, bus companies use the fact they collect cash in strange and remote places to run a similar money transfer business. In fact, you don’t necessarily need a transport system at all – the hawala has worked rather well for many, many years purely on trust and the assumption that transfers roughly balance out.

In a realistic deployment, it’s likely that there will be clearly defined source and sink areas, though – for example, people in the city (a source) send money to the countryside (a sink), migrants to the Gulf (a source) send money back to East Africa (a sink). So it’s more complicated than we often think; the wholesale element may need to advance cash to agents in some places in order to keep the system liquid, rather like a central bank. But whatever else you do, first of all, you need the agents, which means that the business model must make room for them to earn a living.

M-PESA originally used the simplest possible option – a fixed transaction fee. This has the problem that it is regressive; the poor pay more as a percentage of their transactions. In an environment where the competition is cash or the informal sector, this worked against their interests; they later introduced a scale of pricing that tapered the transaction fee off as the transaction size fell. Either way, the pricing was pre-determined with regard to the end user.

ZAP works completely differently. Instead of a rate card, ZAP has a revenue-share between the agents and the network, and the vendors can set whatever price they believe the market will bear. Further, Zain is planning to monetise this by collecting an explicit transaction fee from their agents in cash; most other operators have instead used an implicit fee by charging for SMS or USSD traffic used by the service.

Reducing uncertainty – Zain and the Kerala example

In an oversimplified way, this ought to have the effect of rapidly discovering the market clearing price. However, it’s also true that the market for this service is likely to be geographically fragmented, locally monopolistic, and skewed by asymmetric information. In pure economic theory, this may be a problem but it won’t be for long – the markets will eventually converge. But businesses don’t live in theory – they live in practice, and a bad start can easily wreck your chances for good. Remember WAP.

It’s a brave decision from Zain, but we’re concerned it may defeat the purpose of m-banking. After all, one of the main sources of value to the end-user is getting rid of the uncertainty, risk, and transaction costs associated with informal solutions. The famous Kerala study showed that the deployment of GSM radically cut the volatility of the price of fish, and also the spreads between different markets, with the result that the volume of fish that failed to find a buyer before going off was drastically curtailed. The chart below shows the price of fish over time at three markets which successively received GSM coverage; the drop in volatility is clearly shown.

jensenplot.jpg (Source here.)

Uncertainty and transaction costs are exactly the friction that Telco 2.0 keeps saying that telcos should specialise in getting rid of; they are also very often the reason why people decide to form a two-sided trading hub.Hernando de Soto, the Peruvian economist who argues that secure title to property and land is the crucial factor in economic development, has paid the price of success by having his views turn into an oversimplified cliche, but few would disagree with his basic contention that uncertainty and insecurity are a major brake on bottom-up economic development. Therefore we’re concerned that a degree of this seems to be inherent in this model.

Conclusions: more two-sidedness needed

Perhaps this is intended to encourage the recruitment of agents. However, field reports suggest that the agents themselves are harder to find than their competitors. Zain is also charging for both deposits and withdrawals; two-sided theory would suggest that it would be wiser to choose one side to subsidise in order to build transaction numbers.

Experience in West Africa with Orange’s m-banking operations shows that a significant (15%) share of revenue can come from bank interest on customer balances, and the greater the volume of money in the system, the more likely it is that transactions will be carried out by credit transfer rather than cash.

Our preliminary analysis is therefore that deposits should probably be free, that pricing should be as stable and transparent as possible and probably collected implicitly (as SMS or USSD service charges), and that agents should perhaps receive an allocation of free minutes of use for sale in recognition of their recruitment of users rather than cash, minimising the complexity of the system’s internal economy and its need for internal cash transfers.

Do’s and Don’ts of M-banking

On this score, we suspect that Zain may need to change its m-banking business model to compete with M-PESA and Z-PESA effectively.

  • M-banking’s value proposition is reduced cost and uncertainty

  • Agent recruitment is vital

  • Minimise internal cash transfers as far as possible

Google’s Complex Execution of simple Two-Sided Business Model Strategies

Strategy One: Transactions

If your business is all about facilitating transactions, as two-sided businesses frequently are, then an obvious way to make money is to work on commission – to charge a percentage of each deal for your services. This is of course the traditional way of remunerating people whose jobs consist of buying and selling – salesmen , stockbrokers, investment bankers. It sets up incentives to maximise the number of deals and secondly to maximise their value.

Amazon’s merchant pricing is simple enough – when a sale is made, it takes a percentage. But the interesting element in this is that it maximises the number of sales by giving away all its services up to the point of sale. It costs nothing to list your products on Amazon.com – it also costs nothing to carry Amazon products on your own e-commerce site. It costs nothing to use their superb analytics tools to understand your customers. It costs nothing to use their payments system. It costs nothing to ship through Amazon’s forward and reverse logistics…until you actually make a sale, collect the cash, and ship out the goods. There is also no upfront cost for the use of their superlative IT infrastructure – S3, SQS, and EC2 users pay for the capacity they use.

Similarly, the global credit-card network VISA works on commission. It receives revenue from two sources – fees paid by merchants for service, and a percentage transaction charge. The interesting element is that much of the money taken in transaction fees is redistributed through VISA’s internal economy to the banks involved in that transaction, essentially subsidising both the issue and acceptance of credit cards and therefore maximising the volume of transactions. Rather than paying a fee for a credit card, you pay for it in transaction fees, a cost you share with the merchants, who are therefore sharing the incremental revenue from credit card customers with VISA.

Strategy One can be summed up as free entry and transaction charging.

Strategy Two: Bar Takings

Lloyds of London started out as a cafe; everyone knows that. It became an insurance market because a lot of marine insurance brokers went there for their coffee, and stayed for the rumours. Eventually some bright spark realised that if you wanted to buy the rumour and sell the fact, it helped to be close enough to the source of the rumours (and, good heavens, perhaps even the facts) to trade immediately.

But Lloyds Coffee House was still a coffee house. It didn’t make its money by participating in the insurance market; it didn’t levy a percentage commission. It made its money by selling coffee. The more brokers turned up, and the more they spent their time working from the coffee house, the more coffee they sold, and presumably the higher the volatility index rose, what with all the caffeine. Which created opportunities for cooler heads, and any proto-Michael Spencer who planned to run a matched book and make money on volume, running their own little Strategy One business.

Essentially, you’re creating a big pool of customers to sell things to; it doesn’t matter what they actually come to do, and in fact the reality of this may get quite a long way from the original intent. Lloyd didn’t go into business to start a marine insurance market, after all. Perhaps the canonical example of this is London itself; the City originally came there because of the ships, but by the time the port moved downriver and containerisation led to the triumph of Rotterdam, there were plenty of people doing business there for entirely different reasons.

This is also the case of those container ports – businesses spring up in their duty free zones, providing crewing, provisioning, freight forwarding, ship repair and many other services to the passing ships.

Another example of this phenomenon is the way in which the owner of major British airports, BAA plc, has progressively become a company dominated by retailers; its Strategy One landing fees are state-regulated because of its natural monopoly at Heathrow, so it put more and more effort into selling things to passengers waiting for their flights. But this is a slightly different strategy…

Strategy Three: Access

If you’ve accumulated a pool of customers by subsidising one side of the business, you’re in a position to sell them something. Therefore you’re also in a position to sell the opportunity to do business with them to others. Alternatively you can charge the customers for the opportunity to take part; £20 to get in, shut up and dance. Which one you choose depends on the crucial question – where is the scarcity?

To begin with, credit cards were scarce, and therefore merchants were uninterested. VISA arranged things so that the banks benefited from cutting the price of credit cards, and merchants were suddenly under pressure to join in. Lloyds’ 18th-century marine insurers would no doubt have found somewhere to meet up, but without the coffee house they would have had to do so uncaffeinated.

Selling Web ads as if they were billboards has important restrictions – the chance of a sale from any given display ad is low, so advertisers need to buy a large volume. The price of an individual ad is also high because of limitations on display ad inventory. The costs (monetary and non-monetary) of building a reasonable Web site continue to restrict the available inventory and keep prices up. So, all in all, web advertising remains an expensive business for most companies.

Google reverses the logic of display ads (that advertising opportunities are scarce, expensive, and risky) by forcing down the marginal cost of an advert on one side, and by subsidising the creation of ad space on the other. Blogger blogs, Google Maps, Gmail, Google Search are free and so very popular and all create both ad opportunities to sell, and more information to refine the ad-matching process. Contextual advertising, and mass production IT, expand the volume of possible buyers. Google also subsidises the creation of content to advertise against with actual cash payments through its affiliate program and through wholesale deals with major content sources.

The power of combinations

Like all the best ideas, the basic strategies offer much scope for innovation by combining them. Google is trying to build up businesses that generate subscription-like revenues, mostly through Google Apps for Business, and it may respond to the economic crisis by flipping its model and devoting more effort to the buy-side. At the moment, Google’s revenue-earning services are all marketed to upstream customers – the sell side. What could they achieve on the buy side, in terms of Vendor Relationship Management?

The great container ports combine charging for transactions (port fees), charging upstreams for access (businesses in their free zones pay rent), and selling to the crowd (providing services for passing ships).

Two-sided success for telcos will require a similar integrated strategy. Success will not come from a simplistic strategy which involves subsidies on one side and revenues on the other: a successful Telco platform will have a web, or ecosystem, of commercial relationships underpinned by complex business models and pricing strategies. A chart from our strategy report, The Two-Sided Telecoms Market Opportunity, illustrates this point:

Multi-sided%20Markets.png