Business Models Expiry Dates

Your Expiry DateVodafone acquired C&W and is now apparently in merge talks with Verizon and considering acquiring Fastweb. In the meantime Telefonica is selling their fixed line business to Sky and launches TuGo (an Over-The-Top communication service). Two operators, two very different strategies. Nonetheless their origins, and their historical business models, are identical. Did one spot a business model expiry date label that the other is still looking for?

Let’s give a bit of background. The business model of a network operator can be summarised like this: you lay cables (or erects antennas) that provide raw connectivity to buildings or individuals, and once the asset is in the ground (or in the ether), you rent it out. It’s like real estate: your real estate just happen to be fibre-filled ducts, and the more fibre capacity you rent, the more money you make. This model is assets heavy and is intrinsically restricted to the coverage of the network (i.e. you can’t sell services outside of the coverage of your network). Sure, you can then extend the model by becoming a “real estate agent”, i.e. reselling somebody else’s network in the areas outside of your network, but essentially you’re still renting a property.

Then came Skype, Google, YouTube, Netflix, Spotify, etc. They do something very different: they concentrate on delivering a service which is independent from the underlying network (hence “Over The Top” players). Although infrastructure is still required, the model is people heavy (you need software developers, content rights negotiators, etc. and although you might capitalise these costs, they’re not cables and switches, they’re people). As such the model is extremely lean and flexible: you can flex your capacity up and down pretty easily, and you can steer it in a different direction pretty quickly. Try to compare that with taking cables off the ground in a commercially inefficient location and redeploying them in another location. Moreover, the independence from connectivity implies that the target market are the worldwide households or individuals (especially if you sell online), that can be served from a geographically limited infrastructure and organisation. People can market, sell and maintain a software from a central location, while you need them on site to market, sell and maintain a physical network.

The past 20 years of the ICT industry can be read as a competition between these two business models. The network operators have been selling raw connectivity (you pay for broadband connection / speed / download amount), in most cases competing on the easier, but most dangerous, marketing mix lever of all: price. When mobile operators needed to accelerate income on their 3G network investment, they dropped prices and created unlimited tariffs. In building the national fibre infrastructure, fixed operators are still competing on “price per kilo” (or price per bandwidth), in my opinion not the most creative of all possible competitive strategies.

The “Over The Top” (OTT) players have instead been selling something closer to what users value: experiences. Movies or songs are sold on a “per experience” price (not by their weight, or network load): a new successful movie costs more than an old / boring one; a movie in High Definition costs more than one in Standard Definition. That’s because their value for the customer is different, not because of their network payload. Ever heard of a network operator charging you by the number of movies you download?

In fact, I think that network operators have done a bad job in understanding what experience they were delivering to customers, and hence they’ve been building, marketing and selling raw connectivity on a “price per megabit/s” and now find themselves pushed towards commoditisation (commoditisation of the customer perception, since service is undifferentiated apart from speed, and commoditisation of their P&L and evaluation multiples, that are tumbling towards utilities’ ones). And while they were digging roads and getting bits closer to the speed of light, OTT players were busy creating the services that customers want to access through the network. What surprises me is that if you’ve been running a pipe building and management company all along, today you shouldn’t be surprised of being relegated to a pipe building and management company.

The net neutrality debate, the GSMA Joyn initiative, etc. can all be read as an attempt of network operators to bully the OTT players in “sharing the pie”. I think they’re missing the long term vision, with some exceptions.

Telefonica has spotted the expiry date of the network operator business model, and it’s trying to get “asset light” (the sale of O2 Broadband), and investing heavily in OTT (the launch of TuGo); they are doing this in a differentiated way, as their OTT play is leveraging on their existing O2 customer relationship (for billing, for example). At the same time, Vodafone is following a very different path, trying to put more preservatives in their business model, hoping that a more integrated fixed / mobile infrastructure will have a longer expiry date, generate higher value for the customers and, ultimately, for the shareholders. But this is simply doing more of what they’ve always done.

Which one is right is hard to predict; one of the greatest free strategy lessons I got in my life was when Pietro Guindani, former CEO Vodafone Italy, told me that to get the long term vision right is one thing, but to get the timing right is a different matter…

Only time will tell if infrastructure will always have a value for customers. One day Netflix, Google, Spotify, etc. might just give away connectivity, subsidising it with the fees of the services they run on top. Google fiber experiments might be just a beta trial of this business model.

disclaimer: all views expressed are my own.


The CIO of 2015

In the last few weeks I’ve met a number of CIOs at various industry events (see list at the bottom of this post). The main recurring theme was “Where is the role of the CIO going?”, with some even raising the bolder question “Do we really need a CIO”? These questions have been driven by three major trends.First is the emergence of Consumerisation and Bring Your Own Device. The best description of this trend, in my opinion, is from Lynda Gratton’s Future of Work research (and book). “There are indeed enormous opportunities for each one of us to use technology to significantly boost our productivity and indeed create greater innovation. Many of us are choosing to do this by buying our own technological tools rather than waiting for our company to do this for us.” Read her blog post “Are you an Adult at Work?”. Indeed, this is what’s happening: new generations are technology savvy and knowledgeable. They want to make their own IT decisions, and these are usually individual specific and improve the individual’s own productivity. “One size fits all” IT is no longer possible. Standardizing laptops, hard disk images, etc. will be looked at as the ice age of IT. A very interesting twist of this very trend was given by Brian Madden in his Desktop Virtualisation event, which would deserve a blog post on its own: according to Brian, VDI is the latest attempt of old-school IT trying to keep control of the user experience, enforcing an enterprise desktop on top of a user-chosen device. The future of enterprise desktops looks very different to VDI. The same happened when we moved from a mainframe world, to a world where employees had personal computers, and the changes will be as significant.

The second trend is the emergence of Software as a Service (SaaS) and the related Freemium business model: entire departments are adopting SaaS solutions without consulting the CIO, and it’s extremely easy for them to do: all they need is a credit card to sign-up to an online service, something they’re used to do at home. Think of HR implementing the latest talent management SaaS solution, a sales department migrating to, etc. During the events I attended, a few attempts were made to put a percentage against how much of the IT budget is actually being spent outside of IT. Independently from the exact percentage, it is a fact that the CIO has lost control of this budget, and it ain’t coming back. Trying to regain this control by locking down firewalls, implementing policies is clearly not working: one recurring phrase I heard was “if users want to do it, and you tell them they can’t, they’ll find a way. You’d better give them a better and faster alternative.”

The third trend, which we’ve heard about for a while now, is the emergence of IT as a profit centre, with the CIO having a more active role in revenue generation, and ultimately a seat on the board. Trevor Didcock (CIO EasyJet) and Nick Beighton (CFO Asos) were illuminating: IT brings inimitable success factors to the company; among others, cost to serve in the case of Easyjet, and an items’ range that would require 50 Selfridges in the “real world” in the case of Asos (a strategy similar to Amazon’s. A good reading on the topic is W. Chan Kim’s and Renée Mauborgne’s Blue Ocean Strategy). And no, I don’t buy that this only happens in businesses that are prevalently online: if you want to hear everything about the future of IT talk to Volkswagen’s or BMW’s CIOs: IT success in these companies is measured against how many cars are coming out at every single shift. Literally, it’s their KPI. At the CIO Connect Annual Conference we were asked to discuss a case study where a technical publications’ company moves from books into e-books, online databases, etc. In my opinion this was an excellent example of how IT is taking centre stage, moving to the core business of each company.

Where these trends will lead to was the big question. Some very interesting conclusions on the case studies will be published by CIO Connect, but a broad answer is already emerging: the role of the CIO will more and more split between an operational and a business role. The first will be responsible for keeping the systems running, secure and efficient, and will be measured on cost; this will require embracing SaaS where appropriate, involving third parties, outsourcing, and striking the right balance between mandating some IT decisions and taking a more consultative role for others. The second side of the CIO role will be more business-centric role, and will be looking into IT as a business driver; this will require leveraging on IT for anticipating market trends and customer needs, using IT to open new markets and engage with a broader audience. An interesting aspect is that for this second role to be successful, CIOs will need to embrace external innovation, with a broad consensus towards the up and coming startups: the IT titans of the past won’t provide that differentiation that is needed to make IT unique. Ultimately this latter role will become central for any kind of business, with the majority of the IT budget (someone was talking about 80%) being allocated to this.

If you’d like to discuss, either comment on this blog or contact me directly:


Here’s a list of the events I attended:
CIO Summit
CIO Connect Annual Conference
ComputerWeekly CW500
TechTarget Desktop Virtualisation

Innovation, Patents, iPhone 5, Samsung and why Apple might never be the same

A lot has been said on the Apple vs Samsung patents battle. One of the most interesting articles I’ve read on the topic is FT’s Sebastian Mallaby “American law is patent nonsense”. Let’s get out of the courtrooms, let’s forget about judges and juries for a moment and let’s talk innovation and how to maintain product superiority.

In his “Competitive Advantage”, Michael Porter says that firms that succeed in differentiation strategy often have, amongst other internal strengths, highly skilled and creative product development teams and a corporate reputation for quality and innovation. Sounds like Apple, doesn’t it? Indeed, Apple’s success (iPhone 5 sales might boost US GPD 0.25-0.50%, impressive!) has been a great example of differentiation strategy, and it has in my opinion been built on two main factors.

The first has been the ability to keep a healthy tension between engineering feasibility and user experience, and always favouring the latter. Touch-screens were not Apple’s idea, nor did they have exclusive access to the technology. However the courage of designing and manufacturing the first touch-screen smartphone was Apple’s exclusivity and it’s in their DNA. I can imagine the executive meetings at other phone manufacturers’ headquarters going like “the technology is not ready, let’s stick with what we know” (I still remember  my own fights with engineering, when they were saying that Skype could never be successful as “VoIP without Quality of Service is not possible”…today Skype has 254 million active users/month, without Quality of Service). Clearly this has required incredibly smart engineering at Apple, with the passion and tenacity to solve the most challenging technical quests rather than fighting product management. Just think of the Retina display: the quest was to create the highest resolution display ever on a mobile device (Retina pixel density goes up to 326 pixels-per-inch; by comparison, professional photos are printed at 200-300 PPI, and the human retina has a resolution of 457 PPI at 12 inches / 305 mm from the eye). Existing display technology couldn’t cope with such resolution, as each pixel is made of red, green and blue sub-pixels receiving electric signals and illuminating differently to create colours. If you squeeze too many pixels in an inch, electric signals can get cross, and you lose definition. In the Retina display, pixels and electric signals are on two different planes, one on top of the other, an incredible piece of engineering, an innovation that is comparable to the Trinitron technology on which Sony built their superior quality CRT TV’s business. Now, in order to maintain differentiation you need to keep innovating your product line, and you need you to do it at such a speed that when competitors reach your current state of play, you’re ready to surprise them with your next innovation. How much innovation has gone into iPhone, iPad and iOS since their first debut? I would argue that, beside the incremental innovations in processor speed, better camera and better display, we haven’t seen  much of disruptive innovation. And the same could be said for MacOSX: how much has the Mac operating system  really evolved since its first release on March 24 2001? One could say that there’s not much that can be bettered in these products, but this is Apple, and when we ran out of improvement ideas, Apple used to surprise us with something we didn’t know we wanted…badly. Michael Porter, yes he again, warns that “the risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes”. After all, iPad’s Retina displays are manufactured by Samsung, so it won’t take long for it to be Apple exclusivity (court battles aside).

The second factor, changes in customer tastes, is the second pillar on which Apple has built its fortune: the customers’ sentiment towards Apple. Apple has so far represented our right brain, our creative side. Remember the “1984” campaign, or the “Think different” / “Here’s to the crazy ones” one? Apple was positioning itself “against the system”, and for Apple fans the Apple logo has always been a status symbol (I’m one of them, listening to music on my iPhone while I write this blog from my MacBook Pro and FaceTime with my family back home). It was part of the culture, part of Apple’s DNA: Steve Jobs used to say “Why join the navy if you can be a pirate?”. By spending resources in fighting the courtrooms, who is the navy and who are the pirates? Just watch the Samsung Galaxy S2 advert, and judge by yourself who’s the pirate now. Afterall, it was Steve Jobs who said (watch the interview) “Picasso had a saying: Good artists copy, great artists steal. And we’ve been shameless about stealing great ideas.”. Samsung might just be doing the very same, and they might be better than Apple in the art of “stealing”.

Wouldn’t Apple fans welcome more astonishing and superior products and less courtrooms hearings? Maybe tomorrow, when the iPhone 5 will be launched, they will consider whether their next iPhone will be a Samsung…and whether it’s time to sell those Apple shares.