Business models in consumer technology
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A review of the major business models in use in the consumer technology market, and the keys to success for consumer technology companies. This deck is a shortened version of a longer deck which I regularly present to consumer technology companies and which includes analysis and advice on how they should evolve their businesses given the trends outlined in the deck. A customized presentation is one of the paid services Jackdaw Research offers: please contact me if you would like to know more about this.
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Business models in consumer technology
- 1. Jan Dawson Chief Analyst (408) 744-6244 jan@jackdawresearch.com @jandawson Business models in consumer technology
- 2. 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
- 3. 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
- 4. 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
- 5. 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
- 6. 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
- 7. Examples of profitable cores Highly profitable core Lower margin activities Subsidized 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
- 8. 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
- 9. Expanding from core Hardware Software Connectivity Comms Content Apple Microsoft Google Facebook Digital layer Amazon
- 10. Amazon – odd man out Retailer gross margins, annual 10% 20% 30% 40% 2006 2007 2008 2009 2010 2011 2012 2013 Amazon Wal-Mart Target Kroger Costco 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.
- 11. 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
- 12. Monetization models Direct 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
- 13. 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
- 14. The move to subscription business models Old Models: One-off New Models: Subscriptions Software Licence 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
- 15. Non-monetized models Bundling Data Channel Definition Part 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
- 16. 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
- 17. 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
- 18. 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
- 19. Business model map: Google Monetized Non-monetized Direct Platform Advertising Bundling Data Channel Google Apps Nexus devices Chromecast Drive Play Store Search Gmail Maps YouTube Calendar Android Android Wear Android Auto Note: The longer version of this presentation includes similar maps for other companies
- 20. 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
- 21. 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
- 22. 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
- 23. Where’s the margin? Content Comms ConnectivitySoftwareHardware 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
- 24. 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
- 25. Consumer Electronics margins Operating 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
- 26. 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
- 27. 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 – –
- 28. Competition across four domains in hardware
- 29. 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
- 30. 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 users Amazon active customer accounts Twitter monthly active users iOS installed base Android installed base
- 31. 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
- 32. The pull of ecosystems 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 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
- 33. 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
- 34. Jan Dawson Chief Analyst (408) 744-6244 jan@jackdawresearch.com @jandawson Thank you