GlobalGyan Blog

In an earlier post, we looked at how network orchestrators like Uber, Zomato and Facebook see exponential increase in connections as they add more participants. There is clearly tremendous value in being a first mover and growing market share rapidly, even at the cost of reasonable business economics. Yet, we also see that none of the networks are really unique – every platform idea has spawned several other copy-cats. Most of the markets are still nascent and have a lot of room for growth, so everyone believes they have a chance at success. Moreover, given the asset-light model of network orchestrators, there are no real entry barriers for a me-too product.

This absence of competitive advantage is emphasized by the apparent lack of any platform loyalty by network participants. For instance, most customers of ride-sharing services have downloaded more than one app on their phones; likewise, many drivers have signed up to two or more networks. Availability and price seem to determine choice for both sides of the network. A similar situation of bargain-seeking can be seen in e-commerce and real-estate marketplaces.

As long as the role of the platform is to just aggregate and enable discovery of supply and demand (at no cost to either), there is limited stickiness. The next platform with a slightly lower price or transaction fee will churn traffic to its network. In an extreme but plausible scenario, why wouldn’t the network participants try to disintermediate the platforms? On several occasions, drivers of the ride-sharing networks pass along their business cards, asking to be contacted directly. What would stop the customer from saving a bunch of phone numbers for the promise of a lower price?

Essentially, how do these platforms add value beyond discovery and aggregation? Let us discuss two major sources of value and differentiation that appear to be working for the successful platforms.

Information

Every time a transaction occurs in the network, the platform gains valuable information that can be used to predict future demand / behavior. A taxi network that has analyzed demand / supply patterns can help its driver partners to locate themselves at specific locations that increase the chances of being hailed quickly. The network can ensure that all the drivers do not land up at the most obvious hotspots (e.g. airports) even as customers are waiting elsewhere. Not only does this help the drivers increase capacity utilization, but customers also benefit from faster access to rides. In fact, surge pricing reflects inefficiency in network planning (matching of demand to supply).

The principle would apply to any of the network businesses. E-retailers can plan inventory and logistics better, even as they offer valuable suggestions to customers on what else they might buy. A social network would be able to match people with other people, and people with advertisers much better.

Valuable insights about the network can create improved efficiency on the supply side, and customized access and experience on the demand side.

Risk Management

Any interaction or transaction carries an inherent risk of something going wrong. When it is done bilaterally, each party builds in safeguards to mitigate risk, thus creating inefficiency. If I were to book a cab, I would ask the driver to reach at least half an hour early because I am worried (based on previous experiences) that he would be late. It is inefficient for both of us – the taxi remains unproductive for that time and I might have to pay some waiting charges. Or we mitigate risks by purchasing from well-known sellers (brands) because they offer an assurance of quality. We could have bought a shirt directly, at a lower price, from the contract manufacturer who actually made the branded shirt.

The network platform, as a third-party intermediary, can take on the responsibility of efficiently mitigating our risk, partly through the information it collects and partly through its own due-diligence. By providing an estimated time of arrival (using location information of the driver and rider), the taxi app gives an assurance of availability. By collecting user feedback ratings, the network builds a self-correcting mechanism of quality. Through physical due-diligence (e.g. supplier verification), and standing guarantee to the fulfilment of the transaction, the platform mitigates risk for all parties involved.

Assurance of fulfilment, timeliness and quality by the platform can reduce transaction anxiety and increase stickiness amongst network participants   

There is an Uber of something for almost every industry now. Actually, there are many of them. What will differentiate a successful platform from yet another copy-cat is the ability to use information effectively and efficiently to derive meaningful insights and reduce transaction anxiety.

(This was first published at DNA on October 20, 2015.)

Everywhere you look, there’s an Uber for something nowadays, whether it is healthcare or heavy equipment. The tremendous excitement about companies termed as Network Orchestrators makes one wonder if a dramatic discovery has been in the world of business.

Platforms like Uber or Ola connect drivers with riders and takes a share of the transaction value. Zomato or Foursquare connect restaurants with customers through an exchange of information (menus, photos, reviews, etc.); as they add advertising or delivery transactions, the platforms make money through revenue share. Similarly, Facebook and Twitter connect people with other people or businesses through information; revenue is made through advertising or transactions.  

In essence, network orchestrators enable ‘buyers’ and ‘sellers’ to discover and transact with each other. Most of these companies are rather asset light and their intrinsic value is a function of the number of participants in the network. If you were the only person on Facebook, zero connections would be made. Two persons would create one connection, three persons three connections, and six connections would be possible with four persons. A network of “n” participants gives rise to (n²-n)/2 connections, i.e. the number of transactions is an exponential function of the number of participants. While traditional business models grow linearly when their customer numbers increase, networks grow exponentially when their participants increase.

However, the idea of networks is not new. They have been around for centuries. We can seem them all around us. Financial exchanges are networks that connect buyers and sellers of shares; telecom networks connect speakers with listeners; banks connect depositors and borrowers; and shopping malls connect stores with shoppers. Brokers, whether they be of real-estate, wedding, or acquisition deals, have been around for a while too. Someone jokingly said that Sage Narada from Indian mythology ran the first information network.

So, what is all the excitement about? Why is there so much hype now about network models, and more importantly, such high valuations chasing them? There are three major reasons:

First, technology – a combination of the Internet, mobility and location-tracking – is enabling unprecedented scale to the networks. A real-estate broker was constrained by her time and also the localities which she could cover; an online brokerage has no such limitations. A retail store has constraints of time, location and (physical) space; an e-commerce site has no such issues. The use of technology and automation enables each platform to potentially reach every human being who can theoretically be targeted for that product or service; consequently, value increases exponentially.

Second, networks are being discovered in industries that were not seen as “network-friendly.” For instance, the automobile business was not considered a technology business; however, Uber is playing on the emerging mindset that customers do not need cars, they need a transportation service. Most “traditional” businesses probably have network models hidden in them, the orchestrators are just creating more efficiency and customer satisfaction, thereby taking significant market share away from incumbents.

Third, many of the traditional network businesses lost sight of their core operating model somewhere along the way. Banks, for instance, became asset heavy with lots of branches, systems and people; they are no longer efficiently connecting savings and loans. Similarly, many telecom operators moved to asset based, monthly rental models from transaction led, per minute pricing. This has given an opportunity for new-age players to build more efficient networks. Lending Club, anonline marketplace for peer lending connects depositors and borrowers at a fraction of the cost of traditional banks. Internet-based telephony and messaging company, Whatsapp which rides on others’ telecom infrastructure and provides free services, has 800 million active users, more than any mobile operator in the world.

Network business models are not new; neither are they technology businesses. The most successful of them use technology to accelerate their growth, discover hidden networks in traditional industries and create highly efficient, asset-light business models. Every company can gain from network business models; they just need to know where to look.

(This was first published at DNA on October 10, 2015.)

Last night saw one of the longest keynote announcements from Apple. At over 2-hours, it packed in updates to all their major product categories except computers. John Gruber has a nice summary of the event that you should read.

I wanted to share a couple of observations:

New iPad

When the original iPad was unveiled in 2010, I wrote that this was a computing device for the GAAKS - Grandparents, Aunties, Average J at work, Kids and Students. Over the years, the iPad evolved into a highly capable computer, replacing the use of a PC for many. But for some segments, it was still a media/reader accessory to the traditional laptops. While the iPad offered the great advantage of touch and easy access, it lacked some of the features that power users normally sought. In the business world, it's surely the physical keyboard. In some of the creative fields, perhaps the ability to have precision inputs. The size of the screen and the tablet's computing power were also "weaknesses", for many.

Apple has now made a major push into the enterprise, through partnerships with IBM and Cisco. So it was but natural that iPad would evolve into a device targeted at professionals. The iPad Pro appears to address the "shortcomings" of the previous iPads with its larger screen (13") and a processor that is superior to that of most PCs! More interesting were the two input accessories that were launched - the Smart keyboard and the Pencil. One would need to experience them before getting to a verdict but the videos and demos were superb. 

It is fashionable nowadays to write about the first week or first month anniversaries with gadgets, as well as publicly break-up with them. So, let me join the fray! To be fair to myself, though, I had written about my expectations and first impressions of the iPad - therefore, this is not something new. 

This note is based on personal experiences and should not be seen as applying to everyone. I will try to highlight, objectively, why the Apple Watch works and where it needs improvement. For some, it will work more and for others, it won't at all. 

A few quick, initial comments:

First off, the Apple Watch (in its current avatar) requires an iPhone. That, in itself, is a limiting factor on whom it's meant for. Yes, you could be so impressed with the Watch that you ditch your Android or Blackberry and jump on to the iOS side but that's highly unlikely. (Although for those still on Blackberry phones, just jump on to something else, watch or no watch!)

Secondly, for those in India, it is probably going to be a while before the Watch is available locally. Unless you are willing to jump through hoops to get it from some other country, you have some time to make your decision.

Finally, I would say the Apple Watch (at its price - in INR equivalents) is for the enthusiasts, those early adopters that like to experiment with and experience new products. The inflection point should happen, I believe, this fall when the new Watch OS (and apps based it) become available. 

What worked for me

1.  Reduced the distraction of the iPhone

We have to admit it - most of us are addicted to the iPhone (or any other similar smartphone). Constantly checking for new messages, mails, alerts or tweets - our eyes remain glued to the phone. I have often, while working or in meetings, wanted to put the phone on silent and leave it in my bag, but there's this fear (or desire!) of that urgent call or message that might be missed. So, the phone remains handy and with that, its constant distraction. The iPhone is great because it allows you to do so much with it; that's also its weakness.

With the Apple Watch, my phone has been on silent mode for the most of last month. When I am walking, working or in meetings, the phone is rarely in my hand or within eye-glance. When I want to, I can now focus on the task. Let me give you an example.

I would always carry my phone in my hand while walking outdoors. Perhaps to check time (I had stopped wearing a watch) or to ensure that I didn't miss an 'important' call or message. And since the phone was handy, why don't I quickly check my Twitter feed or oh, there's a notification on FB, let's see what that is.... Before I knew it, my eyes were on the phone even as I was crossing the street or navigating broken pavements. Last week, I was walking somewhere and suddenly it struck me that I hadn't looked at my phone for nearly half an hour! It was in my jeans pocket and I had forgotten that it was there. So what changed?

The Watch has this wonderful wrist tapping mechanism of alerts. I have set it to notify me (and only me) under specific circumstances. Most calls or messages can be ignored for a while; even if a message is urgent, the most likely response is Yes or No. In an exceptional situation, I can answer the call on the Watch itself or send a voice message in response if the canned options don't suffice. 

2. Made me stand up more often

Being very active (physically) doesn't come naturally to me. My work, when I am not teaching in class, requires me to mostly sit in meetings or in front of a computer. Sitting is the new smoking, they say. And all we do is sit (or sleep!). In spite of this knowledge, our lifestyles haven't changed much. It is so easy to continue the status quo.

Unless, there's a tap on the wrist and you are told that it's "Time to stand!" Fifty minutes into an hour, if you've not stood for at least a minute, the Watch prompts you to get up and move about a bit. Standing for one minute per hour can't be such a big deal, you may think. Believe me, even a month later and after being more conscious about the need to stand, I get this alert at least twice a day. The Watch also aids the iPhone's activity tracking - I am more likely to have my Watch on when moving than to have the phone in my pocket. 

While I have not seen any dramatic fitness or weight loss results during the past month, I do check daily how active I have been. Hopefully, results will show soon. Here's an interesting post by someone who used the iOS HealthKit and the Watch to lose a lot of weight!

3.Told me the time

 The Apple Watch also tells the time. With a turn of the wrist or the raise of my arm.

The question is - are the above "benefits" worth the $350 starting price. "Not being distracted by the phone" might appear to be a double-whammy: pay a huge price for the smartphone and then get this watch to reduce distraction! True. But if you are already on the smartphone distraction boat, then the Apple Watch will feel like a liberating force. Yes, you can get activity/fitness trackers for much less, but then they are what they are: bands.

The Watch is a beautiful piece of hardware - not at all geeky. The digital crown and the various straps are very cleverly designed. Yes, it could be thinner but the Apple Watch doesn't feel out of place on the wrist. 

There's a lot that needs to improve with the Apple Watch to make it attractive and value for money for a wider audience. Most of that change is software based, so it can happen without having to wait for the next hardware iteration of the device. The new OS that was demonstrated at WWDC appears to address many of the problems and also opens the Watch up for innovation by app developers. I am waiting to see some good apps that go beyond a miniature version of the iPhone app. My friend Sajith Pai has an interesting idea about leveraging the signaling prowess of the Apple Watch. Time will tell. (Oops, sorry, I couldn't resist that!)

One more thing: I believe the Apple Watch will have serious implications for watch manufacturers, maybe not so much for luxurious, hand-crafted Swiss watches but for the mid-range quartz watches that are in the $50-300 range. How so, when the Apple Watch starts at $350? 

The Apple Watch may focus on its well-crafted, premium segment but it is helping shape a new market category. It's a matter of 12-24 months before competitors and imitators create wonderful looking, good enough, Android-based smartwatches. The traditional watch will then be left with just price as a competitive variable. Try competing on price with Micromax and Xiaomi. 

(Updated: Earlier I had referred to Canvas as distinct from Micromax. Thanks Farhan for pointing it out.)

Referencing John Gruber's post on Working Backwards to the Technology.

This is a wonderful story about the core of Apple / Jobs' philosophy. The post quotes from a 1997 video of Steve Jobs, soon after he returned to Apple and started to change its strategy:

Jobs:

What about OpenDoc? What about it? [Audience laughs.] It’s dead, right? Let me say something that’s sort of generic. I know some of you spent a lot of time working on stuff that we put a bullet in the head of. I apologize. I feel your pain. But Apple suffered for several years from lousy engineering management. I have to say it. And there were people that were going off in 18 different directions doing arguably interesting things in each one of them. Good engineers — lousy management. And what happened was you look at the farm that’s been created with all these different animals going in different directions and it doesn’t add up. The total is less than the sum of the parts.

And so we had to decide, what are the fundamental directions we’re going in? And what makes sense and what doesn’t? And there were a bunch of things that didn’t. And microcosmically they might have made sense; macrocosmically they made no sense. And you know, the hardest thing is… you think about focusing, right? You think, “Well, focusing is saying yes”. No, focusing is about saying no. Focusing is about saying no. And you’ve got to say no, no, no. When you say no, you piss off people.

Everyone who wants to understand strategy should know this. Focus (or choices) is really about saying No. Particularly when there are so many things that one can possibly do (or one is already doing). Even at the cost of pissing off some people.

And if you click on the link at the end of that post, you will come up with this Apple video. Almost every company has a vision, mission, values statements typed out on posters and screen-savers, but unfortunately, their employees or other stakeholders don't know what it means. But this video, in 90 seconds, tells all of us what Apple stands for.

It's one of the biggest technology deals of recent times and there's some worry if we are seeing a repeat of the late 90s dot-com bust. (Remember, many of the 20-something old entrepreneurs were at school then and probably don't have any recollections of that euphoria and bust.)

First, about the valuation. We all know there's really no foolproof, scientific method to value many businesses, particularly in the hi-tech / nextgen space. Like art, it is often in the eye of the beholder. The best way to evaluate a valuation is to to see the most critical assumptions that one has to believe in. Let us peel it down...

Facebook has a Enterprise Value to Revenue ratio of nearly 20. In case of Google, which is obviously more mature than FB, the ratio is about 6. So, to justify the Whatsapp (WA) valuation, first of all we would need to believe that it could generate revenues of $1 - 3 Billion. Is that possible?

WA has 450mn active users and is likely to add a few hundred million new users annually. Is it reasonable to believe that it could touch 1bn users in a couple of years? Smartphone numbers are estimated to be 1.75Bn in 2014, perhaps 3bn by 2017. Can WA achieve 30% penetration? Likely. Remember, already Facebook has nearly a billion mobile users.

So, with a billion user base, WA would have to generate $1-3 per user per annum. Is that inconceivable? No, that's just about Rs 10 per month: all those forwarded jokes are worth that much, right?

Strategically, buying WA makes a lot of sense for FB. As Rene Ritchie points out, Facebook's primary business is to catch our attention (and subsequently monetize it). It was clear that people were spending a lot of time on Whatsapp; most private and small group conversations had moved there and probably FB Messenger was not having the desired impact. WA was multi-platform and easy to use (no login; no "adding"). FB cannot let people's attention wander away from any of its products; so it bought out a competitor.

Then what could go wrong?

For starters, the valuation multiples we started with could be too optimistic. Compared to other, "traditional" technology companies (Apple, IBM, Microsoft, AT&T -- their EV to Revenue ratio is 2 to 3 times), FB appears overvalued, probably Google too. So, if you took a 2X multiple, WA would have to generate $9 per user per annum, which is obviously tougher than $1-3.

The bigger issue is about the monetization strategy. Will a billion people pay a buck every year to keep Whatsapp or will they move to the next free messaging app? What caused it grow exponentially (no login, no "adding") could also be its weakness - mobile number based connections can be replicated on any other app almost as easily. Whatsapp groups will need to be recreated by the admins and profiles will need to be updated but don't underestimate the effort people are willing to put in to save a buck! As several hundred millions come up for their first payment shortly, WA will need to justify why it is better than many other multi-platform, free messaging apps (including BBM which still has many dedicated fans). And of course, the fear of advertising always lurks around the corner.

Overall, I believe it is a good, strategic move by Facebook. By paying only $4Bn (20%) in cash, and the rest through stock, FB has used its highly valued stock to make this risky move. Not only have they purchased a potential billion-dollar revenue product, they have also gained control over a major competitor that somebody else could have acquired. 

Two iconic brands that most of us have experienced are now getting together. Microsoft's acquisition of Nokia's mobile phone business for Euro 5.44Bn could light a spark in an industry that has become a duopoly between Apple’s iOS and Google’s Android platforms. There is no doubt that both Microsoft and Nokia have fallen behind their peers over the last 5-8 years, failing to notice and recognize tectonic shifts in their markets. This deal could put them back in the reckoning, for at least the bronze medal.

Microsoft has traditionally been a software & services company; its recent foray into devices (Surface tablets) has not been particularly impressive. Nokia was, till 2012, the worldwide leader in mobile phones and continues to make impressive devices for all market segments. The complementarity has been further established through a 2-year long strategic alliance between them. Unfortunately, the partnership did not yield much: Windows Phone has just 3.7% share of the smartphone platform market and Nokia doesn’t even feature in the top 5 global smartphone vendor list. Will an acquisition help them achieve the magic that an alliance could not?

For Microsoft, the acquisition is not so cheap; while it gets about Euro 10Bn in annualized revenues, operating margins are at zero. Even with annual operating synergies (read: head-count reduction) of Euro 450mn, Microsoft has to believe in a major turn-around of the business. In its analyst presentation, Microsoft has assumed a 15% share of the global smartphone market to demonstrate long-term value creation potential. From Nokia’s current 3% share, it is a long journey ahead. 

In 2011, new (ex-Microsoft) Nokia CEO, Stephen Elop wrote to his team about them being on “a burning platform” and sought to “take a bold and brave step into an uncertain future”. It must be conceded that at least the fire did not consume them. Its Lumia range of phones have been well received and in several markets outside the US, they are amongst the top 5. However, with even Blackberry (the other beleaguered smartphone company) putting itself on sale, Nokia probably ran out of options. Given its reliance on Microsoft’s operating system, it is likely that the Nokia board did not explore a wide range of suitors. 

For this deal to be successful, Microsoft has to take a fresh look at its mobile device and services strategy. Competing head-on with Apple, Google / Samsung and possibly Amazon would not make much sense. Microsoft-Nokia has to create new spaces for itself, whether in terms of customer segments and / or geographies. It could become a price warrior in emerging market regions where the Nokia brand still has huge salience. Alternatively (or additionally), it could focus on its stronghold, the enterprise market; acquiring Blackberry could be the next step in such a strategy.

Nokia’s transformation from a Finnish paper production plant into a global technology major was a remarkable story. Can Microsoft help Nokia rise again from its current depths? 

BlackBerry as a B2B services / apps player would be of value... Not much left in their devices play (except the familiar qwerty keyboard). 

When I think of enterprise segment, I am not looking at the end-user mobiles as they are today... there are many Business applications that are yet to get mobile-enabled... at some point, with security and data privacy concerns, CIOs could start playing a role (again) in decisions on devices, networks and applications. For instance, BlackBerry has a major play in Automobile OS (through their QNX acquisition)... that is an example of enterprise mobility. There could be similar stuff in Healthcare, Education, etc. These can be huge markets and are not necessarily (directly) tapped by Apple, Samsung or HTC -- yet.

Maybe I expect too much disruption from MS, but let me reiterate: the enterprise mobile market is not what we see today. It is not just a smartphone / device market. It is not Office or email either. Those are being addressed quite well by Android and iOS now. Somebody will disrupt the enterprise software / mobility market. It can be transformed; folks are working on it. Good chance it will not be an insider.