Telecom is not the only business or industry where debates about business strategy include the issue of “pipes versus platforms.”
In fact, almost all businesses use a “pipe” model: they source and create products sold to customers. Firms create products, push them out through various distribution systems for sale to customers. Value is produced upstream and consumed downstream.
Virtually all consumer goods use a pipe model, as does manufacturing, media, most software products and education.
Platforms are different. Unlike pipes, platforms do not just create products and sell them. Platforms allow users to create and consume value as well. When external developers can extend platform functionality using application platform interfaces, that usually suggests a platform model could exist.
Another way of stating matters is that, on a platform, users (producers) can create value on the platform for other users (consumers) to consume. Think of YouTube, Wikipedia, Amazon, Uber or Lyft.
The business implications can be profound. Some attribute Apple’s rise to prominence in the phone industry not on its design, its user interface or operating system features but to its creation of an ecosystem and platform.
In fact, the ability to generate revenue from acting as an intermediary or marketplace for different sets of market participants is the functional definition of whether some entity is a platform, or not.
That can be glimpsed in service provider video subscription businesses, where revenue is earned directly from subscribers, but also from advertisers and in some cases from content suppliers. It is the sort of thing eBay must do, daily, in a more direct way.
To be sure, there are some differences between the traditional app provider platform and any possible connectivity provider platform. For starters, by definition, app platforms tend to be asset light. No surprise there. Software-based businesses almost always are less asset intensive than most other physical businesses.
In general, however any “pipe” business that sells a set of products directly to its customers will tend to require more owned assets than a software business that operates in an ecosystem.
At a high level, when executives and professionals in the connectivity business talk about dumb pipes, they almost always refer to commodity product business models selling undifferentiated carriage or delivery of bits. But there are other senses in which the “pipe” model also matters.
If one believes that prices for telecom products are destined to keep declining, or that more for the same price is the trend, then there are a couple of logical ways to “solve” such problems.
Connectivity providers can create and sell new or different network-based products or shift into other higher-value and different parts of the product ecosystem. That is one way to escape the trap of marginal cost pricing, which might be the industry’s existential problem.
But it is not clear whether telcos can create platform business models, and if so, where and how. The traditional connectivity business seems destined to remain a pipe (create products sold direct to consumer) model. There are glimmerings, though.
Some service providers who now are video subscription providers can create an advertising venue or marketplace once the base of subscribers grows large enough. So that provides one example.
Some data centers work on creating marketplaces or exchanges that enable transactions beyond cross connects, even if the revenue model is indirect (marketing potential, lower churn, higher tenancy, greater volume)
So far, connectivity providers are mostly thinking about what could emerge with edge computing, beyond the pipe revenue model (selling compute cycles or storage). Some might envision a potential role in one or more internet of things use cases such as automobile IoT or unmanned aerial vehicle networks.
Still, it never is easy for any company, in any industry to create a platform model, even if many would prefer it over a pipe model.
But the potential path forward seems logical enough. The historic path to create a platform has often involved sale of some initial direct product, sold to one type of customer, before becoming the foundation for creation of the marketplace or platform that creates new value for different sets of customers.
That strategy might be called stand-alone use, creating a new market by directly satisfying a customer need, before a different two-sided or multi-sided market can be created, where at least two distinct sets of participants must be brought together, at the same time, for the market to exist. Virtually any online marketplace is such a case.
Others might call it single-player. OpenTable, which today has a marketplace revenue model, originally only provided a reservation system to restaurants, operating in a single-sided market mode, before it then could create a two-sided model where restaurants pay money for the booked reservations made by consumers.
The first million people who bought VCRs bought them before there were any movies available to watch on them. That might strike you as curious, akin to buying a TV when there are no programs being broadcast.
In fact, though commercialized about 1977, it was not firmly legally established that sales of VCRs were lawful until 1984, when the U.S. Supreme Court ruled that Sony could sell VCRs without violating copyright law, as Hollywood studios alleged.
So what were those people doing with their VCRs? Taping shows to watch later. Time shifting, we now call it. Only later, after Blockbuster Video was founded in 1985, did video rentals become a mass market phenomenon.
So here is the point: quite often, a new market is started one way, and then, after some scale is obtained, can develop into a different business model and use case.
Once there were millions of VCR owners, and content owners lost their fear of cannibalizing their main revenue stream (movie theater tickets), it became worthwhile for Hollywood to start selling and renting movies to watch on them.
Eventually watching rented movies became the dominant use of VCRs, and time shifting a relatively niche use.
So OpenTable, which operates in a two-sided marketplace--connecting restaurants and diners--started out selling reservation systems to restaurants, before creating its new model of acting as a marketplace for diners and restaurants.
The extent to which that also will be true for some internet of things platforms is unclear, but likely, even for single-sided parts of the ecosystem.
The value of any IoT deployment will be high when there is a robust supply of sensors, apps, devices and platforms. But without many customers, the supply of those things will be slow to grow, even in the simpler single-player markets. Just as likely, though, is the transformation of at least some of the single-player revenue models to two-sided marketplaces.
In other words, a chicken-and-egg problem will be solved by launching one way, then transitioning to another, more complicated two-sided model requiring scale and mutual value for at least two different sets of participants. In a broad sense, think of any two-sided market as one that earns revenue by creating value for multiple sets of participants.
Amazon makes money from product sellers and buyers, while at the same time also earning revenue from advertisers and cloud computing customers.
Telcos have faced this problem before.
Back in the 1870s and 1880s, when the first telephone networks were created, suppliers faced a severe sales problem. The value of the network depended on how many other people a customer could call, but that number of people was quite small. The communications service has a network effect: it becomes more valuable as the number of users grows.
These days, that is generally no longer the case. The number of people, accounts and devices connected on the networks is so large that the introduction of a new network platform does not actually face a network issue. The same people, devices and accounts that were connected on the older platform retain connectivity while the new platform is built.
There are temporary supply issues as the physical facilities are built and activated, but no real chicken and egg problem.
It remains to be seen whether some connectivity providers also will be able to create multi-sided (platform) markets for internet of things or other new industries.
The initial value might simply be edge data center functions. Later, other opportunities could arise around the use of edge computing, the access networks, customer bases and app providers. It would not be easy; it rarely is. But creating new revenue streams for some customers who just want edge computing cycles could create foundation for other revenue streams as well.
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