Big Internet Winners Prospered Using Non-Traditional Revenue Models: Can Device and Access Providers Do the Same?

Radically-new business models are something of a rarity in the communications, computing or consumer appliance business, though rather common in the Internet applications space.

Google is the best example of a technology company--or a software company--creating a business model on advertising, not sales of computing equipment or “packaged software.”

To the extent Amazon is viewed as a technology company--not a retailer--it might be be the first to build a build a business model on e-commerce. But PayPal might be an even-better example.

Up to this point, consumer electronics suppliers, including smartphone suppliers, have generated significant application or content revenue streams, but still representing a minority of total revenues. What could happen in the future is the issue.

As device supplier Xiaomi might put it, the firm someday might make money the way that
Tencent and Alibaba do, namely by selling games or engaging in e-commerce, and not by “selling phones.”

That ambition would be quite rare, if realized. But such rare outcomes might ultimately be decisive for any number of eventual big winners in the Internet ecosystem.

Oddly enough, the traditional or legacy communications “app providers” (voice and linear video) are making less money from apps and more from “access.”

Where use of a network was only a prerequisite to selling the service, now “dumb pipe” access to Internet apps is a major, and growing, underpinning of both mobile and fixed network businesses.

Recall that consumer Internet access, easily representing a third of revenues for many firms, is a classic dumb pipe service, allowing consumers to reach app providers and facing profit margin pressures.

Voice and video are apps--managed services--still represent major revenue sources, but are dwindling, overall.

The broader point is that business model innovations are becoming essential. Over time, cable, telco and satellite providers will earn less money from legacy apps, and more from dumb pipe access operations Profit margins then will be key.

That might not be a challenge restricted to access providers. Few smartphone suppliers except for Apple and Samsung actually make any money selling phones. And even app suppliers or bundlers are likely to make as much money from transactions, e-commerce or advertising as they do from app sales.

Even if direct sales account for the bulk of sales revenue, such activities often do not generate much actual profit.

So the broader strategic issue is how successful most  suppliers in the Internet ecosystem ultimately will be in creating new revenue and business models based direct content and app sales, and indirect (sponsorship, transaction or e-commerce) revenue streams.

For some suppliers, revenue streams based on e-commerce or advertising, even when relatively small, could have outsized implications. Xiaomi, for example, sells smartphones almost at cost, hoping to create huge audiences for applications.

Apple traditionally has had the opposite model--offering content to drive sales of devices--but seems to be moving in the direction of greater reliance on app, transaction or content revenue streams (mobile payments, mobile apps, streaming video services).

In a direct sense, mobile service providers creating connected car services--and selling “just” 4G access to vehicles--are an example of efforts to drive higher sales of apps, not access.

Mobile remittance services (generally successful) and mobile payments services (relatively unsuccessful) provide other examples. Firms such as Verizon have, so far, made little progress in creating viable mobile streaming services, but the outcome is not determined, , and such efforts are bound to continue.

The ultimate problem, for most contestants in any Internet segment, is that the number of viable suppliers in any category might be quite limited. In advertising, Google and Facebook dominate. In mobile advertising, Facebook might be the bigger factor at the the moment. In the e-commerce-supported arena, Amazon is trailed by lots of retailers who have yet to make much of a dent, in terms of market share.

Internet service providers (telcos and cable TV firms) are entering new terrain. They historically have prospered by selling apps that require the use of networks. Now their legacy apps can be provided by third parties.

The one truly-new line of business is Internet access. But because of network neutrality, that is a dumb pipe business, by definition, in the consumer segment.

That might be a situation more contestants in the Internet ecosystem find themselves confronting, in the future.

All the effort that goes into creating and selling devices or access could wind up generating a relatively small portion of actual profit, even if essential to the profit mechanism.

That could happen in two ways. Device and access providers could fail to gain a significant role in the apps and transactions role, and ride a dumb pipe or commodity business to the bottom. In that case, access and devices simply is not a high generator of profits, even when generating lots of gross revenue.

In another scenario, the new apps and transaction businesses or will have successfully created app and transaction services of sufficient size to drive profit margins.

Across the ecosystem, actual direct sales (apps, devices, access) remain vital. But indirect revenue models increasingly will be important (commissions, fees, revenue sharing), as core products (devices, apps, access) face blistering competition.

To the extent the analogy fits, think Google, the first technology company to build a revenue model based on advertising, or Amazon, the first technology firm to build a revenue model on e-commerce, or PayPal, perhaps the first technology firm to create a revenue model based on transaction fees.
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