Classic Platform Business Model Revenue Still a Science Project for Most Big Connectivity and Cloud Computing Firms

Network as a service, computing, storage or infrastructure as a service might easily be confused with a platform business model. After all, platform business models tend to involve use of remote or cloud computing, an application for ordering, provisioning, payments and customer service. So do many XaaS offerings. 

XaaS can provide value including reduced cost; greater agility and security that is maintained at industry leading levels. Sometimes XaaS also can provide advantages in terms of innovation or potential customer scale. 

But the difference in business models is not “buy versus build” or “virtualized” access, scale or innovation but the mechanism by which revenue is earned. A virtualized service offered by a “pipeline” business model provider is still an example of a traditional pipeline model: the seller creates the service and sells it to the customer. 

Amazon Web Services computing and storage functions, for example, are “sold as a service,” but that does not make those AWS products part of a platform business model. The Amazon Web Services Marketplace, on the other hand, is an example of a platform business model.

The marketplace supports transactions between third-party sellers to Amazon customers where Amazon earns a commission on each sale.

The general observation is that, at this point, though many firms are trying to add platform business model operations, those operations remain at a low level, compared to traditional pipeline operations. 

Classically, a platform earns revenue by earning a commission for arranging a match between buyer and seller. AT&T’s online marketplace, for example, allows third parties to offer internet of things products available for purchase from AT&T customers. 

AT&T also once hosted its own advertising platform Xander, which was sold to Microsoft. It allowed firms to place advertising on AT&T’s websites and apps. 

So far, revenue contributions have been small enough not to identify as distinct revenue streams. 

Likewise, Verizon once operated Verizon Media that placed ads on Verizon content assets, but that business was sold to Apollo Funds.

Some might consider the use of application programming interfaces evidence that a platform business model is in operation, but that is incorrect. APIs might be used to support a platform business model, but use of APIs, in and of itself, does not change the business model. 

APIs, though, are often a capability exploited by business model platforms, to connect users of the platform; to allow third-party developers to contribute value; to collect user data or to create revenue by charging fees for use of the APIs.

The GSMA Open Gateway initiative supporting APIs usable across networks supports a traditional pipeline model, where the firms create, support and sell their products directly to customers. 

So at least so far, few tier-one connectivity providers have shifted a significant portion of their operations to platform business models, or made it the key strategic direction. Recent asset dispositions by AT&T and Verizon suggest that approach remains experimental and non-core. 

Pipes to Platforms? What is Required?

If the “dumb pipes” business model of a transport network is “broken,” the issue for connectivity service provider executives is “what replaces that model?” and “how do we get there?”

Beyond the throwaway platitudes, one possible model is to “become a platform.” But there is much misunderstanding about what a platform is, and what it takes to function as a platform. To the extent that scale is required, a legitimate issue is whether, realistically, every connectivity provider can become a platform.

A platform business model essentially involves becoming an exchange or marketplace, more than remaining a direct supplier of some essential input in the value chain. It is, in short, to function as a matchmaker. 

The platform facilitates selling and buying. The platform allows participants in the exchange to find each other. 

Platforms are built on resource orchestration; pipes are built on resource control. Value quite often comes from the contributions made by community members rather than ownership or control of scarce inputs vertically integrated by a supplier. 

A pipe business focuses more on efficiency in its value chain, where a platform focuses more on orchestrating interactions between members. 

A pipes business success metrics revolve around customer value. A platform emphasizes ecosystem value creation. 

So “lifetime customer value” is a reasonable metric for a pipes business. 

A platform often creates value because of the scale and scope of the interactions between members of the ecosystem, so the range and depth of interactions might be a better metric for a platform. In other words, the platform is easy to join, easy for participants to use and easy to federate. 

Effective application program interfaces are one aspect. But effective logistics, settlements, data exchange, payments and information on ecosystem participant behavior might be other important aspects for ecosystem transactions and interactions. 

Perhaps the best models are multi-product e-tail firms such as Amazon, Alibaba or eBay; ride hailing companies such as Uber or Lyft; content exchanges such as YouTube; payment services such as PayPal; lodging exchanges such as airBNB; food delivery services such as GrubHub;  messaging platforms such as WhatsApp or social networks such as Facebook. 

source: Innovation Tactics 

Platform revenue models also are known as multi-sided business models. In traditional usage, multi-sided business models also were those which earned revenue from buyers (users) and sellers. Newspapers which earned revenue from users (subscriptions) and sellers (advertising). 

The newspaper was a platform--or multi-sided business model--that connected advertisers with audiences; buyers with sellers. Virtually all ad-supported media also used multi-sided business models. The point here is that the platform business model is technology independent. 

As a corollary, just because a business is based on use of technology--such as the internet--does not automatically mean that business is a platform or uses a multi-sided business model. 

Also, “digitizing” business processes does not necessarily make an organization a platform, or change its business model. Virtually all businesses use technology and software. That does not make them platforms.  

In the pre-internet era, operating systems were platforms. Important caveat: platforms can lose their value over time. Few now believe operating systems are key platforms, or have the power they once had as platforms. 

In the internet era, app stores might be considered platforms. What all these business models tend to feature are the ability to match buyers and sellers, rather than direct ownership of some function in the value chain. 

There are some analogies to the traditional telecom business, which though a supplier of direct connectivity services to paying customers, also serves as an intermediary to connect end users on the network. 

The difference is that the telecom service provider business model is not based on facilitating transactions between end users and then building a revenue model on those transactions. Instead, the traditional “fee for service” telecom model involved supplying the function of communications itself. 

“Rather than playing a direct role in the supply chain, companies build digital ecosystems or marketplaces connecting consumers with producers of goods and/or services,”  says the TMForum. 

Almost as a byproduct, internet-era marketplaces are based on electronic marketplaces.

source: Lumen Technologies

If not, the further issue is whether being part of somebody else’s platform, and continuing mainly to supply connectivity, is a viable growth model. 

The platform business model aggregates consumers and producers through an ecosystem. “The real strategic value of a digital platform is to harness the service offerings from a diverse supplier base, and then to use shared orchestration, monetization and administration tools to offer new service bundles,” says BearingPoint.

For PCCW Global, this evolution means creating a “platform” that connects many trading partners in an ecosystem, and not simply providing connectivity services to other service providers, enterprises, data centers, mobile operators and consumers. 

source: PCCW Global, MEF 

As envisioned by PCCW Global, all suppliers of services to end users would be connected to those users over the platform. So application providers could reach their users and customers using the platform; but also other trading partners. 

That would allow for all sorts of innovative solutions to be created, built, modified and supported with something approaching near-real-time provisioning, with automated systems allowing low-cost charging models that essentially allow all sorts of value-generating products to be created, delivered and supported at costs impossible or difficult to support in a manual processes environment.

It will not be especially easy to create such a platform, given the rivalries between hyperscale cloud giants and faster and alternative ways of creating proprietary platforms.

"Telco as a Platform" Will be Tough

Telco as a platform is a buzz phrase that is equally hard to understand.  Analysts at Appledore Research, for example, urge telcos to become platforms. What they mean is that telcos need to disaggregate functions and value, 

In one sense, the notion is that business models can diverge. “We identify five new types of telco business that will result from embracing Telecom as a Platform: The Utility Telco, the Network Sharer, the Neutral Host, the Innovation Telco and the Hyperscale Platform,” Appledore says. 

Generally speaking, the idea is that telco platforms are “open rather than closed,” with roles that can range from simple “bit pipe” operated at low cost to wholesale models to strategies that require creating or owning applications and services of many types. 

Typically, the advice is to use the open approach to build ecosystems of value, as Rakuten is doing. The key observation, however, is that the Rakuten approach involves using the telecom network to support applications and services that Rakuten itself owns, as well as third party apps and services. 

source: STL Partners   

Still, disaggregating the functions necessarily builds on the idea that the transport and access networks themselves are going to become a commodity, as the telco ecosystem mimics the internet itself: any lawful app accessible by any customer or user irrespective of the transmission network. 

By definition, transport becomes a simple “bit pipe” function, largely undifferentiated and no longer providing any gatekeeper role. That does not preclude a telco owning and operating other assets also able to use the bit pipe. Rakuten might be a good present example of that. 

On the other hand, it must also be noted that this requires that telco efforts move beyond the traditional core skill set of building and operating communication networks. Anybody with long roots in the industry knows that is both difficult and rarely successful at scale. 

In fact, virtually all equity analysts consistently recommend against such an approach. Business analysts, on the other hand, routinely argue there is almost no other long-term growth strategy. 

 

source: Appledore Research 

Of course, there are several ways the term “platform” is used. It sometimes is a business model. 

About “40 percent of the world’s top 30 brands are now platform businesses ,” BearingPoint consultants have argued. Platform business models involve making money from transactions that happen on the platform. 

In that sense, eBay is a platform; Amazon is a platform; Apple is a platform; YouTube is a platform. 

But “platform” sometimes is used in the computing industry sense, where the telco network is a foundation for other apps to use. Think of the roles played by Intel, Microsoft Windows, Linux or computers themselves. 

In the computing business, a platform is a set of hardware or software upon which other third-party apps can run. So Windows has always been seen as a platform, as have the Intel line of processors. 

In that sense, the internet is a platform for both communications and applications. But there is a new sense of the term that refers strictly to business model, not computing or communications infrastructure. 

In the internet era a new meaning has emerged. A platform is a business model based on an entity that acts as an exchange, connecting buyers and sellers. 

source: Simon Torrence 

A platform business model essentially involves becoming an exchange or marketplace. A pipe model requires a firm to be a direct supplier of some essential input in the value chain.

A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. A pipe business creates and then sells a product directly to customers. Amazon is a platform; telcos and infrastructure suppliers are pipes. 

Amazon is a platform. Etsy is a platform. Uber and Lyft are platforms. Airbnb is a platform. All connect buyers with sellers; sellers with sellers or buyers with buyers. None of those platforms “owns” the assets traded on the exchange. 

It all boils down to “who makes the money” and “how” the money is made. Even when understood as a business-to-business marketplace, a bandwidth exchange, for example, a key principle is that buyer and seller transactions volume is how the platform makes money. 

A true platform in the digital commerce  sense does not own the actual products purchased using the platform, and makes money by a commission or fee for using the platform to complete a transaction. A ridesharing platform does not own the vehicles used by drivers. A short-term lodging platform does not own the rooms and properties available for rental. An e-commerce site does not own the products bought and sold using the platform. 

In that sense, no telco I can think of actually operates as a full platform, yet. Service providers always make money directly from selling services (access and transport). Sometimes they also own apps that run on the network. But few actually operate as actual exchanges, making money from transaction fees. 

If by “platform” one means a business model based on transactions, few telcos will be able to manage the transition. A platform business model essentially involves becoming an exchange or marketplace. A pipe model requires a firm to be a direct supplier of some essential input in the value chain.

A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. A pipe business creates and then sells a product directly to customers. Amazon is a platform; telcos and infrastructure suppliers are pipes. 

Platform creation is not especially easy for a connectivity services provider. If you think about every business as either a “pipe” or a “platform,” then most businesses are “pipes.” They create a specific set of products and sell them to customers. That is a classic “one-sided market.”

A bandwidth exchange might be one example of an actual connectivity business platform. The operator of the exchange would federate business access to networks of all sorts, allowing customers to buy and sell use of any of the assets. The exchange could focus on consumers, business-to-business, carrier-to-carrier, app to app; computing as a service or almost any combination of those transactions. 

But the exchange might not actually own any of the underlying networks. By that measure, “becoming a platform” is a tall order.

Pipe or Platform?

For all the talk of the value of “platforms” in the internet ecosystem, platforms are much harder to create than the typical “pipes” business. So the “good advice” to “become a platform” might apply to only a smallish percentage of all connectivity provider businesses. 

A platform business model essentially involves becoming an exchange or marketplace. A pipe model requires a firm to be a direct supplier of some essential input in the value chain.

A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. A pipe business creates and then sells a product directly to customers. Amazon is a platform; telcos and infrastructure suppliers are pipes. 

Platform creation is not especially easy for a connectivity services provider. If you think about every business as either a “pipe” or a “platform,” then most businesses are “pipes.” They create a specific set of products and sell them to customers. That is a classic “one-sided market.”

It arguably is easier to build and sustain a business using a “pipe” model than a “platform” model for a number of reasons, but primary among those reasons is that a pipe model only requires knowing what problems the potential buyer faces, and then coming up with a workable and affordable solution. 

Creating a platform model requires understanding the problems that at least two sets of participants may have, and then devising a way to solve each participant’s problem. At a crude level, that means a platform’s business value challenge is twice as hard as that facing a pipe provider. 

Of course, for all the attractiveness of a platform model, it can be argued that creating a platform is much more capital and scale intensive than operating an alternative pipe model. In fact, small firms have almost no choice but to operate using a pipes model. 

Also, some businesses we think of as “platforms” might actually operate as pipes. Amazon’s e-commerce operations are a classic platform. But Amazon Web Services arguably operates as a pipe: it sells customers computing or storage services that actually are “pipe” products.

In other words, AWS is an example of one supplier (AWS) selling a specific product directly to one customer. One might say the same for a single retail brand selling online. That is a pipe model, not a platform, as it features one seller, making transactions with a single buyer. 

Another way of stating this is that a pipe model has customers interacting with a seller; a platform has users interacting with each other. 

Also, the value for different sets of participants might be asymmetrical, which is why platform providers sometimes have to create incentives for one side of the platform to participate. Uber pays its drivers, for example, to ensure adequate availability for riders. AirBNB compensates rental partners for their participation. Expedia pays booking commissions to its travel providers. 

Yet another way of illustrating the difference is that a platform orchestrates interactions and value. In fact, a platform’s value may derive in large part from the actions and features provided by a host of ecosystem participants. Facebook’s content is created by user members. Amazon’s customer reviews are a source of value for e-tailing buyers. 

Consumers and producers can swap roles on a platform. Users can ride with Uber today and drive for it tomorrow; travelers can stay with AirBNB one night and serve as hosts for other customers the next. Customers of pipe businesses--an airline, router or phone suppliers, grocery stores-- cannot do so

You might be aware that firms in an ecosystem often move into adjacent roles within the ecosystem, or challenge incumbents in other ecosystems. Though that can be done by either a pipe or a platform, it might be easier for a platform. 

Network effects and communities both have business value, and platforms might be able to more easily transfer scale advantages to new lines of business. Pipe-oriented firms can do this as well. The difference might be the ease of scaling platform assets, which by definition require wide participation by lots of different firms and industry segments.

A pipe-oriented business will have advantages in its current customer base, ex-customers and suppliers. A platform might already have relationships with supply chain, payment, logistics, marketing or user relationships that are far broader. 

In a pipe business, the seller “creates value” represented by the product sold. In a platform business, value can be created in different ways, such as recommendations. In that case, neither the platform itself or the sellers of products are creating the value, but the customers or users. 

The other issue is that any business using the internet is itself participating on a platform, though perhaps indirectly. And as is true for most products sold or exchanged over the internet, there is a tendency for excess profit to be removed, which means any product available on the internet--by pipe or platform--tends to move towards zero margin. 

Also, many businesses may operate partly as a pipe and partly as a platform. Perhaps the Apple iPhone provides a good example of that. 

Loosely-Coupled Value Chains and "Becoming a Platform"

Loosely-coupled value chains create new business problems for firms used to operating in tightly-coupled value chains. The big business problem is the “permissionless” ability to participate in the value chain. 

App, content or marketplace suppliers do not “need the permission” of the access provider to conduct business. And that lessens the connectivity provider’s ability to construct a direct business relationship with any app layer supplier, as well as the app provider’s need for any such relationship. 

Even in the case of multi-access edge computing, where there arguably is a greater value to integrating 5G access functions with edge real estate, “convenience” or “time to market” or “cost” is more often the driver of collaboration than “necessity.” 

So one often hears advice for connectivity providers that they must move beyond the connectivity role. 

“In order to monetize 5G, operators need to move from a connectivity mindset focused on the underlying technology to providing a network as a platform that connects customers efficiently with their services (in the way they choose) by enabling multiparty B2B and B2B2X models,” argues  Sandra O’Boyle, Heavy Reading analyst.

It is reasonable advice. In fact, creating a platform or ecosystem is de rigueur thinking these days in most industries. 

But “platform business models” are very difficult to create in the communications services business, even when it remains true that connectivity is required for modern cloud-based computing.

Few words are as misused or misunderstood as “platform.” Only “digital transformation” comes close. A platform business model is based on an entity facilitating transactions between third parties, and making money by doing so. Older examples include eBay and Amazon, which do not “own” the products being bought and sold on their exchanges. 

Even used in the classic sense within the computing industry, operating as a platform means that third party apps can be built using the platform. To be sure, there is indirect value as the ecosystem of apps and peripherals compatible with the platform grows. But there often is no direct financial relationship between any of the third parties and the platform upon which they run. 

Newer examples of platform business models include Airbnb, which facilitates the renting of short-term lodging, without owning the rentable assets. 

 

source: Andreessen Horowitz 

A platform business model essentially involves becoming an exchange or marketplace, more than remaining a direct supplier of some essential input in the value chain. It is, in short, to function as a matchmaker. 

The platform facilitates selling and buying. The platform allows participants in the exchange to find each other. 

Platforms are built on resource orchestration; pipes are built on resource control. Value quite often comes from the contributions made by community members rather than ownership or control of scarce inputs vertically integrated by a supplier. 

To use an analogy, the whole business runs on electricity, but in few cases do we hear strategy advice to “partner” with electricity suppliers. 

It is true that network slicing creates bandwidth on demand and customized forms of bandwidth on demand that support potentially new revenue or value creation models for enterprise users of the network.

But that is not so much a case of “creating a platform business model” as it is creating additional value for connectivity services. 

O’Boyle says this adds “flexibility to support any service for any industry through any business model.” True, but not necessarily an instance of “changing” a connectivity business model. It is an instance of potentially increasing the value of communications, though. 

Perhaps the better way to characterize network slicing is less a shift away from a connectivity mindset and more an issue of whether connectivity providers can reposition at least some of their revenue opportunities in other parts of the value chain that do indeed benefit from network slicing. 

In other words, generating revenue as an app, marketplace or service provider--in addition to earning money as a connectivity services supplier--is the issue. Owning apps and operations that create value is the issue, rather than “becoming a platform.” 

Few connectivity service providers can genuinely hope to become a marketplace supporting transactions between users and suppliers of bandwidth and access, rather than making money selling such access directly to customers. 

In a strict sense, the former means the marketplace owner does not own the assets being bought and sold; the marketplace simply makes money when a transaction occurs. When the latter case--selling connectivity services to customers--remains the main source of revenue, a firm is not truly using a platform business model, no matter how sophisticated its products.

"Platform" Business Models are Difficult For Lots of Good Reasons

It comes as no surprise that when an industry runs headlong into a business model discontinuity, the search for an alternative model becomes acute. A broken business model is an existential crisis of the first order, challenging the very ability to stay in business. -

And business models have been an issue for connectivity and data center providers for decades, in ways large and small. Competition and its effects on gross revenue and profit margins have been key for the former; a shift to cloud computing has arguably been central for the latter. 

But in both industries, executives must expend serious effort to revamp, revise or create different business models as a way of sustaining growth. One example is the replacement of fixed network services by mobile services as the primary engine of growth in the connectivity business. 

For many service providers, mobility now drives 70 percent to 85 percent of revenue growth and  profit. In the fixed networks business, where voice--especially long distance--once drove industry profits, it now is an essential feature of service, but not the revenue driver. 

Internet access now is the key service, but that product is historically challenged as well. Lower costs per gigabyte have been a trend in the connectivity business in every segment, including the mobile business, with the perhaps predictable outcome that mobile operator profit margins drop over time as well. 

To be sure, local markets have different profiles where it comes to general price levels, growth rates, revenue magnitudes and value of revenue sources such as roaming. So revenue upside and growth potential does vary. 

Still, maturation or saturation remain key business challenges. And that is why connectivity providers have spent so much time trying to reinvent themselves, create additional value and new products and features, to outgrow their declining core businesses. 

That, in turn, explains the interest in platform business models. 

“Platform” is a term often seen when people talk about firm business models, and it often is misunderstood, in part because we are so used to hearing the term used to describe computing products and services. 

A platform is a business model. that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers. Platforms facilitate interactions between buyers and sellers, audiences and advertisers, Simply, platforms create interactions, linking supply and demand, rather than creating and selling owned products.  

source: Innovation Tactics 

A platform business model is a type of business model where a company creates a foundation for other companies or individuals to build upon and offer their own products or services. This is done by providing a set of tools, resources, and infrastructure that others can use to create and distribute their own products or services.

A platform can take many forms, but generally, it involves three main components: a set of customers, a set of suppliers, and a set of rules and standards that govern the interactions between them. The platform itself can be a digital product or service, such as a website, app, or marketplace, or it can be a physical infrastructure, like a transportation network or a power grid.

source: Innovation Tactics 

Examples of platform business models include:

• Social media platforms like Facebook, Twitter, and Instagram

• E-commerce platforms like Amazon and Etsy

• Ride-sharing platforms like Uber and Lyft

• Online marketplaces like Airbnb and TaskRabbit

• Payment platforms like PayPal and Venmo

Platforms can create value by connecting customers with suppliers, reducing transaction costs, creating network effects, and making it easier for suppliers to reach customers. Platforms also benefit from economies of scale and scope, as their value increases as more customers and suppliers join the platform.

Whether this can be done in the connectivity business remains to be seen. Some would argue data centers have gotten further down the path. When data centers say they are ecosystems of value, that is true in many respects. Even when the actual revenue model is “selling space, air conditioning and security,” the value of specific data centers frequently includes features such as which connectivity network providers; tenants, app providers; software infra providers or content providers also are collocated within a particular data center.