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January 11, 2019

Do Blockchain Business Models Imply A New Business Playbook?

As more startup are springing up on Blockchain technologies, it is normal to see the proliferation of Blockchain protocols that promise to disrupt any industry. Just like when the web started to become mainstream, thanks to technologies like search engines.

We saw the birth of many search engines that made the search market fragmented; up to when Google became so dominant to tame most of the search market share.

Are we assisting also today to a similar phenomenon? In part. However, to understand the Blockchain Economy and the business models that will spring from it we’ll need a slightly different business playbook!

Business models in the internet era

The internet gave rise to a whole new set of business models. Not by chance, the term “business model” has become widely adopted throughout the spreading of IT tech companies:

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There is one critical point to notice. Where the internet allowed new companies to emerge. That created the rise of business models that before were not possible. One trivial example is Netflix delivery of streaming content via the internet, with a subscription-based business model.

Today that model has become the standard. However, when you start thinking about how value has been created and captured in this internet era, one word comes to mind: data.

When you scroll the Facebook feed, what makes it so addictive is the ability of its algorithms to tap into behavioral data of its users to give more and more “meaningful” suggestions that only make people wanting more.

When you keep watching Netflix, its algorithms learn more about your tastes and preferences to create a stickier experience, that over time makes you wanting more.

Those algorithms learn through data, which might be classified as interactions you have on the platform. All that data is stored and handled by massive databases, called graphs. The access to those graphs isn’t open; it’s proprietary.

Indeed, that data is the main asset of those tech companies. It is what makes them monetize their business models, create unique experiences for their users and retain value in the long-run.

Therefore, even though initially the internet era paved the way for hundreds of new business models. It also created a winner-take-all effect. Where those companies able to capture network effects, would eventually gain a massive competitive advantage.

For instance, according to the Venture Capital Funding Report by CB Insights and PWC, the venture capital deals have increased substantially in 2018, compared to 2017:

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However, as pointed out by venture capitalist Fred Wilson, these deals were “fewer and larger.” In short, in the last years of the internet era, investors and existing players are consolidating toward larger deals that are creating more consolidation, winner-take-all effects, and high barriers to entry.

It is true that as of 2019, new internet companies can be born and become the next Facebook or Google. Yet, it might not be as true as it was a decade ago. The tech players dominating the market might use their cash at the bank to buy them up.

In short, the internet seemed to have produced more open business models compared to the past (initially it did). Consolidation kicked in, and new “conglomerates” have formed in the marketplace.

While this process might be normal in a world where applications powered by proprietary data took over, ti might not be so in a blockchain economy, let’s see why.

A blockchain economy based on fat protocols and thin apps

Joel Monegro, from USV venture capital firm, pointed out a compelling theory about value creation in a blockchain economy. This is the “fat protocols theory:”

Here’s one way to think about the differences between the Internet and the Blockchain. The previous generation of shared protocols (TCP/IP, HTTP, SMTP, etc.) produced immeasurable amounts of value, but most of it got captured and re-aggregated on top at the applications layer, largely in the form of data (think Google, Facebook and so on).

In other words, the protocols that allowed the web to work in the first place didn’t manage though to capture economic value, which instead went through applications. In a blockchain economy, the opposite happens. Applications become marginal compared to the protocols that make them work (think of Bitcoin or Ethereum).

Joel Monegro – argues – it happens for two reasons:

Shared data layer: in an internet-based business model most of the value is in the data captured from a platform or application. That data is proprietary, so the access to it will be restricted so that the company (think of Facebook, Twitter or Google) can monetize it. On the other hand, in a blockchain-based business model, data can’t be closed, it will be shared. This will reduce the barriers to entry, and will allow new players to come into the market more easily
A cryptographic “access” token with some speculative value: in short according to Monegro, this aspect creates a token feedback loop, where interest in the token creates speculation and increases the value of it, which in turns only attracts more attention. This phenomenon, in turn, makes the value of the protocol grow way faster than the value of the applications built on top of it

This theory has important implications, as it points out how we need to change our way to think about business. That also might imply a new business playbook!

Do we need a new business playbook?

If we want to succeed as business persons in a blockchain economy (when and how it will prove to work), we need to change our playbook then.

In an infographic by visualcapitalist.com you can appreciate, how tech players that were dominant by the late 1990s have become marginal today:

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For instance, back in 1998, AOL and Yahoo represented the Internet! Most of the web traffic went through those portals. In 2018, Verizon, which had created a business unit called Oath (which comprised Yahoo and AOL acquisition) wrote them off for approximately $4.6 billion!

Twenty years from now, who will still be on that list?

New business models might emerge at the protocol level

When Google announced its IPO, back in 2004, the world wanted to know its numbers. Everyone knew Google was a profitable company. Yet when it finally Google opened up the hood, the reality was even better than imagination:

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Google made over three billion dollars in revenues and about four hundred million dollars in profits! The web wasn’t just that bubble that burst during the dot-com era. It proved to be a whole new world. Business people took notice.

If a blockchain economy might prove sustainable in the long-term, understanding of how the web evolved and how tech companies became successful will be critical.

However, we’ll need to look at this phenomenon with different eyes. We might want to keep our focus on those protocols that will eventually dominate the blockchain economy as value captured might subsequently be there.

The blockchain as a new business model toolbox

When the web kept growing at an exponential pace, new companies and innovative business models sprouted up. On this blog, I have spoken at length about the innovation introduced by Google Business Model and why I believe this is what made it so successful.

The paradox though is that what seemed an innovative business model a few years back, it seems has become an accepted and standard business model today. Another paradox is that as those tech giants have taken it all, many business people assume that this is the way it was supposed to be.

When you think about the hidden revenue generation model of Google and Facebook through advertising. This model has worked exceptionally well in the internet era, as Google and Facebook could retain the ownership of the data generated by billions of users around the world.

Another business model would have been too difficult. That is also why managing this data from massive, centralized data centers makes sense.

The blockchain might change that, as it allows finally to control data at the decentralized level. Each user might be able to retain the ownership of the data, while the company will make money based on its protocol.

A few examples and use cases of Blockchain business models

In the last few years, many new companies have been created, based on Blockchain protocols. I’m mentioning just a few use cases I’ve been following, especially in the publishing world.

Bitpress for fact-checking

Bitpress is developing a framework that in a way should allow a better, bottom-up fact-checking mechanism. Will this succeed? Hard to say. There is one aspect though that I think is might be critical.

In their PageRank mechanism, they want to allow publishers to express an opinion on the resources they link to. Those links can carry a vote which isn’t necessarily positive, but it can also have a negative connotation.

In other words, Google‘s PageRank has also been built on the assumption that links are good votes that a site passes along another site.

Just like in academia, where referencing to another author means a favorable vote. So Google‘s PageRank has used the same mechanism to rank web pages.

This has opened up manipulations and drawbacks. For instance, as of today nonetheless, the sophistication of Google‘s new algorithms driven by AI, things like private blog network or PBN (a network of websites that exchange links from each other) are still a reality.

Those not only might be a mechanism that still works to rank web pages. But it also requires a lot of resources from Google to catch up with those networks. In fact, as of now, besides intelligent algorithms; Google might have a militia of engineers browsing the web to find those networks and blacklist them!

Would Bitpress mechanism prove successful?

Steemit for getting paid as a publisher

I got passionate about the Steem Blockchain the day I’ve read their white paper and when I started to experiments with the many apps sprouted up on this blockchain.

The most exciting part of this blockchain is the way it allows its community to monetize while either curating or writing content.

In short, Steemit and other Steem Blockchain apps, pay their users to do what they already do on another social network, for free. This model has still proved to be sustainable in the long run and as I explain in this article there are still some challenges.

However, if this model proves effective, it might become the next big thing to take over purely centralized giants like Facebook, Reddit, and Quora.

Dock.io for professional data management

A company which most crucial asset is made of the data of its users will make sure to preserve it. However, as short-term logic might prevail by time to time, those companies will also try to profit as much as possible from that data.

This places the company owning the data in the conflict of interests with its users. For how much that company is comprised of smart individuals. Conflict of interests and the way the system works might well make those companies mismanage the data.

Dock.io is envisioning a decentralized way to manage professional data, which gives ownership to the users and have them choose which third parties can reuse that data.

Key takeaway and the Blockchain “killer app”

What I find most striking of the new Blockchain protocols that are getting created is that those allow the experimentation of new business models that challenge the old ones created during the web era.

Those business models though might be skewed toward protocols, rather than apps! One thing is clear so far. The blockchain killer app is “decentralized trust.” Where tech companies have proved pretty bad in handling our data (see the Cambridge Analytica scandal).

You won’t have to trust anymore a central authority, driven by business incentives with your data. You will trust a mathematically driven decentralized network. Of course, we don’t have to fall into the “utopian trap” where we think innovation is better than existing ones.

The Blockchain Economy might also allow new centers of power. Also, existing tech companies (Facebook is one) are also investigating into a potential way to integrate it within their existing business models!

Handpicked popular content from the site:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
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How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Does Twitter Make Money? Twitter Business Model In A Nutshell
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How Does Netflix Make Money? Netflix Business Model Explained

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Published on January 11, 2019 10:36

January 9, 2019

The 60 Business Model Patterns You Need To Know [Infographic]

In this article, we cover the Business Model Navigator Methodology, which in my opinion is among the most effective way to craft a business model. The BMI Lab gave us the opportunity to feature all the Business Model Navigator Patterns identified by the research of Oliver Gassmann, Karolin Frankenberger, and Michaela Csik.

All the materials and resources suggested are not linked to affiliations. I don’t earn anything from those suggestions, and I decided to feature the Business Model Navigator Methodology because I think it is an extremely valuable framework for anyone interested in business modeling.

Why is business modeling such a hot topic?

Business modeling has become a critical topic which rose of interest in the late 90s, until it became ubiquitous, after the rise of digital businesses and the dot-com era:

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How the terms “business model” and “business models” grew exponentially after the 1990s

The reason business modeling has become such a popular topic is that with the rise of tech companies and digitalization, a competitive advantage isn’t captured anymore with product and processes.

Instead, the ability to assemble a unique business model has become a key element.

In this article, we’ll take into account the Business Model Navigator methodology developed by Oliver Gassmann, Karolin Frankenberger, and Michaela Csik.

Indeed as explained in “What is a business model?” there is a single way to assess, understand and describe a business. There are several methodologies, each with a set of assumptions about the critical components of any business. Among those on FourWeekMBA, we covered:

Business Model Canvas
Lean Startup Canvas
Value Proposition Canvas
Blitzscaling Business Model Innovation Canvas
Growth Hacking Canvas

Each of those tools is quite useful from several standpoints. For instance, a business model canvas is an excellent place to start to have a complete framework of any business by looking at components such as key customers, partners, channels, and so on.

The lean startup canvas is a variation of business model canvas, based on the concept of lean startup and it is a good starting point for smaller businesses and startups.

Instead, a framework and tool like Blitzscaling canvas (I created this canvas by starting from the Blitzscaling book) is an excellent place to start if you need to assess whether your company or startup has all the key ingredients to scale up.

We’ll focus now on the business model navigator, which I found among the most effective tools to dissect any business, given its simplicity and effectiveness.

What’s a business model according to the Business Model Navigator Methodology?

What is precisely a business model? There isn’t a single definition of business modeling.

As pointed out by Oliver Gassmann, Karolin Frankenberger, Michaela Csik in The St. Gallen Business Model Navigator:

The business model can be defined as a unit of analysis to describe how the business of a firm works

In short, a business model is how the different bits and pieces of a company come together to form a whole, a sort of organism, which grows, survive and thrive in the marketplace.

Therefore, as defined in the book Business Model Navigator “a business model provides a holistic picture of how a company creates and capture value.”

The Business Model Navigator Methodology

The Business Model Navigator Methodology uses a simple framework to dissect a business model which looks at who, what, how and why of a business.

Those four dimensions allow you to map any company’s business model by having a complete picture of its engine. For instance:

The Who focuses on understanding the target customer.

The What helps to map the value proposition or the products and services offered and how they compel your target customers

The How defines the value chain or the set of activities the company undertakes to execute the value proposition

And the Why is about financial viability and how the company can balance between cost structure and revenue generation to achieve profitability

What is a business model pattern?

A business model pattern is a blueprint to creating new ideas and achieve business model innovation as a mean to create a lasting competitive advantage.

The BMI Lab gave us the opportunity to feature all the 60 Business Model Navigator Patterns identified by the research of Oliver Gassmann, Karolin Frankenberger, and Michaela Csik:

ADD-ON
AFFILIATION
AIKIDO
AUCTION
BARTER
CASH MACHINE
CROSS SELLING
CROWDFUNDING
CROWDSOURCING
CUSTOMER LOYALTY
DIGITIZATION
DIRECT SELLING
E-COMMERCE
EXPERIENCE SELLING
FLAT RATE
FRACTIONAL OWNERSHIP
FRANCHISING
FREEMIUM
FROM PUSHTO-PULL
GUARANTEED AVAILABILITY
HIDDEN REVENUE
INGREDIENT BRANDING
INTEGRATOR
LAYER PLAYER
LEVERAGE CUSTOMER DATA
LICENSE
LOCK-IN
LONG TAIL
MAKE MORE OF IT
MASS CUSTOMIZATION
NO FRILLS
OPEN BUSINESS MODEL
OPEN SOURCE
ORCHESTRATOR
PAY PER USE
PAY WHAT YOU WANT
PEER-TO-PEER
PERFORMANCE-BASED CONTRACTING
RAZOR AND BLADE
RENT INSTEAD OF BUY
REVENUE SHARING
REVERSE ENGINEERING
REVERSE INNOVATION
ROBINHOOD
SELF-SERVICE
SHOP-IN SHOP
SOLUTION PROVIDER
SUBSCRIPTION
SUPERMARKET
TARGET THE POOR
TRASH-TO CASH
TWO-SIDED MARKET
ULTIMATE LUXURY
USER DESIGNED
WHITE LABEL
SENSOR AS A SERVICE
VIRTUALIZATION
OBJECT SELF-SERVICE
OBJECT AS POINT OF SALE
PROSUMER

Key takeaway

A business model is a holistic picture of a business and how its bits and pieces come together to form a whole, that becomes a financially viable organization able to serve a target audience, through a value proposition executed via a value chain. While there are several tools, frameworks and methodologies to assess a business model, the Business Model Navigation Methodology by Oliver Gassmann, Karolin Frankenberger, and Michaela Csik from BMI Lab is – in my opinion – among the most valuable methodologies to assess any business model.

One common denominator is innovation and how business modeling can help you build a lasting competitive advantage for our business!

Suggested reading: The Business Model Navigator

I suggest you read the book if you want to have a deep understanding of the topic and the framework we discussed:

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Resources for your business:

Handpicked popular case studies from the site:

The Power of Google Business Model in a Nutshell
How Does Google Make Money? It’s Not Just Advertising!
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
How Does Netflix Make Money? Netflix Business Model Explained
How Does Spotify Make Money? Spotify Business Model In A Nutshell
The Trillion Dollar Company: Apple Business Model In A Nutshell
DuckDuckGo: The [Former] Solopreneur That Is Beating Google at Its Game

The post The 60 Business Model Patterns You Need To Know [Infographic] appeared first on FourWeekMBA.

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Published on January 09, 2019 14:33

Google Business Model Canvas

A business model canvas is a framework to design a company’s business model. At the same time that can be used as a tool to dissect, understand others’ companies business models and how they are positioned in the marketplace.

In this article, we’ll look at the Google business model canvas. Keep in mind that the business model canvas is just one of the frameworks you can use to build, design or assess a business model.

Also, a business model canvas will capture where a company is or where it will want to be in the future. Thus, we’ll look at where Google business is at the time of this writing.

While a business model does create a long-term competitive advantage, being able to innovate it over time is critical. If Google itself doesn’t want to be disrupted, it will need to evolve its business model.

This might imply a complete change in a few years on a few things that comprise its business model according to the business model canvas like key partners, distribution channels and customer relationships.

While the vision of a company might stay the same, other things like value proposition might change substantially.

Google key partners

Each day billions of people get online, and they “google things up.” For many of those people, Google is de facto the web. Yet it hasn’t always been this way. There was a time, back in the late 1990s when the web was called AOL.

Indeed, probably more than half of the traffic on the internet went through this portal. When Google launched, while it had figured a great product and search engine, it didn’t have a business model yet.

For instance, by reviewing some of the thoughts of Google founders Page and Brin, it seems clear that they thought advertising wasn’t well suited for a search engine:

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In the paper, they pointed out their “mixed feelings” about the advertising business model. As they believed any search engine based on the premise of advertising in a way went against its primary mission.

However, over time Google figured a way to show advertising in a way that would not affect user experience.

Since the beginning traffic going through Google’s digital properties (its search pages) has been a critical ingredient for its long term success.

That is also why initially Google made a deal with AOL to be featured as a primary search engine on its portal, which gave it massive visibility.

AOL on its hand was offered such a good deal, and it also saw search as a secondary feature, that it couldn’t say no to Google. Therefore, while we give for granted the billions of queries – that each day – go through Google.

We miss the fact that Google had to build up a vast distribution network that each day guarantees it this traffic. This isn’t a simple network, but rather a massive infrastructure worth billions of dollars each year.

How does this infrastructure look like? There are a few elements:

Partnership agreements

One example is the multi-billion dollar deal with Apple to have Google featured as a default search engine on Safari. Traffic doesn’t come from thin air; it comes from physical devices.

As the web has shifted from desktop to mobile devices, Google has developed its distribution strategy (for instance via Google Chrome).

However, a vast array of devices (take iPhones or iPads) are operated by Apple IOS operating system and its internet browser (Safari). To be featured on those devices Google pays a substantial amount of money.

Open handset alliance

As pointed out above mobile users have grown massively in the last decade. This implies that whoever takes hold of the mobile content consumption can build a sustainable business model for years to come.

With other 84 technology and mobile companies, Google forged the Open Handset Alliance. In fact, in 2005, Google acquired Android (what would become the prevailing operating system for mobile).

Just after a few months from the launch of the iPhone by Steve Jobs, Google announced its Open Handset Alliance. The aim was to build “the first truly open and comprehensive platform for mobile devices.”

The business model behind the Open Handset Alliance is a simple one. Google provides its free of charge, the operating system for mobile devices, Android, and in exchange for many apps, like Google Play and Google Chrome come pre-installed.

AdSense network

It wasn’t just traffic the critical ingredient for Google success. It could offer relevant and high-quality content compared to any other portal, or search engine.

On the one hand, Google had figured out how to offer relevant ads by introducing AdWords with its quality score. On the other hand, it needed to balance that with high-quality organic content from the web.

While Google did offer that by indexing the entire visible web, it managed to improve quite a lot when it offered to any publishers (independently from their brand) the possibility to monetize their content via the AdSense network.

Comprising millions of websites around the world; those websites allow Google to tap into their sites to place banners from businesses that want to advertise their services. Google shares the advertising revenues generated from those banners with these publishers.

Webmasters

A great payoff of Google is its ability to send qualified traffic to any site, based on searches people perform. For instance, if I search for “car insurance” on Google, I will find a few text-based ads on top of its search results.

At the same time, I’ll also find may other organic results, that didn’t pay a dime to be featured there. This is possible because Google has a massive index of the web, and if that content is relevant, it will be featured on Google’s first page.

Being on Google’s first page might turn in substantial income for those sites able to rank through it. In particular, web owners can submit their website via Google Search Console (a platform to monitor the indexing of a site) to control how Google sees the site.

This allows publishers – independently from being part of Google AdSense – to “control” their rankings vis Google organic search engine. Millions of webmasters each day help Google index their content, and make it easier for the search engine to keep a qualified index of the web!

Google key activities

Google mission is to “organize the world’s information and make it universally accessible and useful.”

This bold vision requires Google keeps innovating in the search industry, while it also looks forward to new ways the web is developing. From voice search, visual search, machine learning and more.

Google needs to invest first of all in a robust and secure infrastructure that makes it possible for the company to handle each day billions of queries. This implies a few key activities:

At a basic level, Google has to keep innovating its search algorithms. This alone requires substantial investments.
As voice search is growing it is critical that Google keeps innovating by also offering new products. For instance, Google launched its new voice devices, such as Google Home, which compete against other tech giants, like Amazon‘s Alexa and Cortana.
Google still generated most of its revenues from advertising. A business model based on a single source of revenue might not be sustainable in the long run. That is also why Google is investing resources in betting in other areas that might lead to the next innovation.

Google’s value proposition

For a tech giant like Google, which has a sophisticated business model, based on a hidden revenue generation, there isn’t a single value proposition.

Instead, several value propositions will serve the purpose of keeping key partnerships that allowed Google to scale up and let it today to maintain its market dominance. Thus, if I had to summarize the fundamental value propositions those would be:

The value proposition for billion of users

Free search engine for billions of users around the world. This is how Google managed to grow quickly. A great, reliable and free service that allowed users anywhere in the world to find the information they needed, fast.

Tools and productivity apps

Besides its free search engine, Google also offers a set of free tools and apps (to mention a few: Gmail, Google Analytics, Blogger, Google Books, Google Chrome and many others). Those free tools are among the most used in the business world.

Google advertising business

The core of the Google business model is advertising, focused on targeted text-based ads for businesses offered via the AdSense network.

Before Google existed,d there was no way for marketers to know in details all the conversion metrics of their ads. While Overture was the first in offering CPC advertising, Google managed to scale it up at massive levels.

Google AdSense

Before Google disrupted the advertising world and took over the digital advertising market, a few established publishers could make money via advertising.

With its AdSense network, Google also allowed small publishers to monetize their content.

In a way, it was a democratization of the digital advertising market, where anyone with the content that got the most eyeballs and attention could monetize on it, independently from its brand.

Google AdSense is still an essential element of Google value proposition.

Google customer relationships

The cash cow for Google is its AdWords network, made of a growing number of businesses looking to sponsor their products and services. That implies two things.

First, Google needs to keep offering targeted ads that allow those businesses to generate leads. Second, Google is as worth as much as the qualified traffic it can generate.

This implies that Google needs to keep focusing on making sure that users go back to its search results pages. Indeed, even if users do not pay for Google search results, they are the products.

As any attention merchant, Google is selling back their attention. That means Google will need:

Salesforce able to support AdWords (now Google Ads) businesses

Offer the proper support to businesses part of the AdWords network requires a substantial investment in business development people able to expand the list of companies that join Google’s advertising network. This implies local initiatives, training, and support to those businesses.

Privacy

Companies like DuckDuckGo have built their business on Google weakness in terms of privacy. If those concerns are not addressed Google might be losing an increasing chunk of users, willing to switch because of privacy concerns

Google customer segments

In terms of value creation, with its massive business model, Google has several “customers” not intended only to businesses paying Google for service but also those people or organization that contribute to Google financial success. In that respect we have:

Free internet users

Internet users around the globe. Even though Google is a free service, Google‘s users are among the most important “customers.” If Google lost them, there would be no business at all.

Agencies, marketers, and businesses

Those who are bringing big bucks to Google are agencies, marketers and businesses part of its Ad Network. They are driven by the fact that Google is an incredible source of targeted, and qualified traffic.

Publishers

AdSense Network Members allow Google to offer targeted ads on their web properties.

It is important that Google keeps offering those publishers enough incentives to keep monetizing their content via the AdSense platform.

I treat them here as “customers” because Google still needs to “convince” them to use the AdSense platform to monetize their content.

Google key resources

Even though Google is a digital business, that might make you think the company has no real assets. This is far from the truth.

As of 2017, Google had $7.2 billion of contractual obligations, primarily related to data center operations, digital media content licensing, and purchases of inventory.

This implies a few key resources:

The most basic thing any sites with a large number of traffic needs is a massive server infrastructure. Back in the late 1990s when Google was still in the very initial stage at Stanford, it brought down its internet connection several times, by causing several outages. That allowed its founders to understand they needed to build up a solid infrastructure on top of their search tool. Today Google has a massive IT infrastructure made of various data centers around the world.
Another element to allow Google to stay on top of his game is to keep innovating in the search industry. Maintaining, updating and innovating Google‘s algorithms isn’t inexpensive. Indeed, in 2017 Google spent over $16.6 billion in R&D, which represented 15% of its total revenues.

Google distribution channel

I believe that one of the vital ingredients to Google success was its distribution strategy, since its first few years of operations. That is also why Google relies on:

global sales team which uses business development to keep growing Google operations
Google deals and partnerships that bring it on billions of devices in the world

I’ve extensively covered Google distribution strategy below:

The Deal That Made Google The Tech Giant We Know Today
Why Google Success Was The Fruit Of Its Business Distribution Strategy

Google cost structure

With its over $110 billion in revenues in 2017, Google reported a $12.6 billion in net profits. This implies a few critical items in its income statements:

traffic acquisition costs is a crucial metric to assess Google ability to generate value over the years:

[image error]TAC stands for traffic acquisition cost, and that is the rate to which Google has to spend resources on the percentage of its revenues to acquire traffic. Indeed, the TAC Rate shows Google percentage of revenues spent toward acquiring traffic toward its pages, and it points out the traffic Google acquires from its network members. In 2017 Google recorded a TAC rate on Network Members of 71.9% while the Google Properties TAX Rate was 11.6%.

As we’ve seen R&D costs represented 15% of its total revenues, or $16.6 billion
Sales and marketing represented 11.6% of its revenues or almost $13 billion
Datacenters costs also represent another good chunk of Google cost of revenues

Google revenue streams

Google business model can be broken down into three main lines:

Google advertising network
Google other revenues (consisting of Apps, in-app purchases, and digital content in the Google Play store; Google Cloud offerings and Hardware)
Google other bets

Google business model canvas (video case study)

Google infographics

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[image error]The traffic acquisition cost represents the expenses incurred by an internet company, like Google, to gain qualified traffic on its pages for monetization. Over the years Google has been able to reduce its traffic acquisition costs and in any case to keep it stable. In 2017 Google spent 22.7% of its total advertising revenues (over $21 billion) to guarantee its traffic on several desktop and mobile devices across the web.

[image error]

Other resources for your business:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
How to Write a One-Page Business Plan
The Rise of the Subscription Economy
How to Build a Great Business Plan According to Peter Thiel
What Is The Most Profitable Business Model?
The Era Of Paywalls: How To Build A Subscription Business For Your Media Outlet
How To Create A Business Model
What Is Business Model Innovation And Why It Matters
What Is Blitzscaling And Why It Matters
Business Model Vs Business Plan: When And How To Use Them
The Five Key Factors That Lead To Successful Tech Startups
Top 12 Business Ideas with Low Investment and High Profit
Business Model Tools for Small Businesses and Startups

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Published on January 09, 2019 13:22

January 8, 2019

What Is Business Model Innovation And Why It Matters

Business model innovation is about increasing the success of an organization with existing products and technologies by creating a compelling value proposition able to allow an organization to scale up customers, with a better operating model.

At its core business model innovation is a subtle change, that as it becomes hard to dissect from the outside world (in many cases business model innovation is detected when an organization has achieved massive success), it is also hard to copy.

Thus, in a world where technology has become, in part a commodity business model innovation can make a huge difference.

Before we move forward toward deciphering and dissecting business model innovation, let’s bust three myths, existing in the entrepreneurship world, especially in the era of digital business models.

Myth one: the best product wins

When you get online, and want to look for something, but you’re not sure what is that chances are you’ll land on a white page with a small search box on it, that is Google search results page.

Why in the first place do you get there?

Well, you get there because Google is an incredible product, able to find you anything on the web at a super fast speed. Yet, is Google the best product out there? And how do we define best?

Well, Google is a great search engine able to give you relevant results to any question, but it also benefits from network effects. In short, one of the reasons why Google is good enough in intercepting search intents is the fact that billion people around the world use each day.

At the same time, Google is a decent product for what it gives us back (and it is free), but it also has drawbacks. For instance, in an experiment, an SEO expert tried to rank a Latin Language site (a language used by ancient Romans, no longer in use) and guess what? It did that successfully.

This is not to say that Google is not a good search engine. Google today is the most widely used search engine on earth, and part of the reason why is thanks to its distribution strategy.

Since its scale-up phase, Google aggressively acquired deals that made it the tech giant we know today. However, a few people realize it, and it is easy to think – especially in tech – that the best product wins.

A great product with a lack of distribution strategy won’t go far.

Myth two: technology is what gives a competitive advantage

Peter Thiel, former CEO of PayPal has shifted an important business paradigm. As the common business thinking goes “be the first and you’ll probably win over time.”

This is called in business jargon, first-mover advantage. Peter Thiel, instead pointed out an important paradigm, especially in the tech industry, which is the last-mover advantage.

In other words, companies that come later, especially in the tech industry, can win over existing organizations, even when those were the first movers. For instance, Google and Facebook were not the first movers to move in the search and social media space. They dominated it.

What happened there? The answer is business model innovation!

Myth three: business modeling innovation is just about how you make money

When Google came out of the Stanford dormitory where the two P.h.D. had invented it, it was a great search engine. Many argue it was 10x better than competitors.

Yet it wasn’t financially successful until it managed via a couple of years of trial and errors to design an innovative business model. In short, Google introduced an auction system for advertising, which aim was to remove the inefficiencies of how advertising had worked for decades.

That was not the primary innovation. Indeed, another search engine called Overture was already doing it successfully. Therefore, where Google innovated was the introduction of a few critical parameters to allow advertisers to show on top of Google text-based ads results.

In other words, it wasn’t enough to be offering a higher bidding rate on a keyword. Google crossed that with a few other parameters which allowed to show on top of the ads space on Google results, those that were most relevant and had a higher click-through rate.

Even though it might sound trivial now, as the whole web, after Google has been built on the premise of click-through-rate, it was not back then. That business model innovation was critical to Google economic hypergrowth, scale, and domination.

Business modeling isn’t a simple concept, and in the mind of most people, that is about how you make money. However, business modeling is way more than that. It is how you make a great product or service so that your customers keep coming back.

It is about how you make that product or service scalable. And how you keep making financial sense of your business over time. But also the value proposition you’re able to deliver to key partners, which are a crucial ingredient of your business success!

Thus, even though business model innovation can be about changing the way you charge your customers and how you make money, it can also be about other critical aspects of the business that will allow you the scale up.

There isn’t a single path to business model innovation, but there are a few critical questions to ask.

What kind of questions do you need to ask with business model innovation?

To understand how to innovate a business model you might want to think along the line of how to tweak and redesign your value chain, cost structure, key partners and in general what can help you scale:

How can I design a better value chain?
Can I improve the existing cost structure?
What is the distribution channel that can accelerate growth?
Why is my company experiencing bottlenecks in certain areas?
Is the organizational structure helping the company to grow as it should?

Paths toward business model innovation

There isn’t a single path toward business model innovation. At times you can design a business model drawing from your previous experiences in that industry.

Other times you’ll have to figure it out along the way. Among the many paths to business model innovation, we’ll see three paths that might be quite interesting for your business.

Engineer an innovative business model from scratch

As Reid Hoffman points out in his book Blitzscaling business model innovation is a key ingredient to success, especially in the digital space, where a countless number of companies offer innovative tools and solutions on the market.

That’s why in some cases business model innovation can be engineered before

This is what happened when I cofounded LinkedIn. The key business model innovations for LinkedIn, including the two-way nature of the relationships and filling professionals’ need for a business-oriented online identity, didn’t just happen organically.

As explained by Reid Hoffman he used his understanding of the social networking world (he had founded a social network called SocialNet) to design an innovative business model for LinkedIn, which got acquired in 2016 by Microsoft for an astounding $26.2 billion.

In short, what gives a competitive advantage isn’t any more technology alone but a combination of technology paired with an innovative business model.

Yet designing a business model isn’t always possible beforehand. In some cases, you need to experiment, reiterate and find it

Find an innovative business model along the way

When Google was scaling up, it didn’t figure it all out right away. Although the tech giant has incredible technology and product, it still lacked behind in business model innovation.

When it finally, after a few trial and errors figure it out (Google was running out of investment money) it was a massive success. When Google had to show its numbers, when it got listed back in 2004 the company made already over three billion in revenues, a 155x growth in about four years!

[image error]

In this scenario, you need to try and test many things before you can say to have a business model that makes you scale up sustainably and that it does make sense financially.

In the end, if you do find it, you’ve created a long-lasting competitive advantage!

Use business model innovation as a survival mechanism

Imagine if the next time you reserve an Uber ride, you’ll see coming to a self-driven car. Now stop imagining. Indeed Uber has been investing in self-driving cars since 2015.

Why would a company that is dominating an entire space make such a move? Well, a couple of reasons. First, if self-driving cars become mass adopted Uber would be out of business.

This implies that if Uber wants to thrive in the next era needs to be on top of this game. The second aspect is about business model innovation. Among its key partners, Uber has drivers across the world.

Yet those drivers also pose a significant threat to Uber success. Even though Uber might be pulling the plug or spinning off its self-driving cars business, this example is to show how the company never stop experimenting with business model innovation.

Business units like Uber Eats, Express Pool, Freight are all an attempt to tweak an existing business model until it allows the company to become financially sustainable, also at a massive scale.

Business model innovation examples

I will repeat over and over again; a business model isn’t something static. Thus, even if in this article we’ll look at how Google business model looks today, it might be probable that in a few years time Google business model would have evolved as well.

Indeed, even though a business model does create a long-term competitive advantage, it does also require a continuous tweaking make sure all the pieces of it come well together.

Many argue that business model innovation is what makes a difference in a company’s success. Thus, even though many believe that product or technology is the most critical competitive advantages.

From a business standpoint, business modeling has proved to create a real edge, especially since digital businesses have taken over the business world. This is no exception for Google.

When the company started back in the late 1990s, it wasn’t the first search engine. It was a better product than many others on the market, yet it wasn’t just technological innovation that made Google successful.

It was when Google finally found its business model, that revenues took off. In 2004, Google’s had to reveal its numbers for the first time to the public. As the company was going public, when it opened its financials to the public everyone was astounded.

Google was among the first few companies that proved the internet wasn’t just a cool new thing. But instead what would give rise to new, disruptive business models.

Nonetheless, the dot-com bubble that would wipe out most of the companies that had a “.com” in their company’s name, the few that survived became also the basis for a technological revolution that would also spur a business revolution and vice-versa.

For instance, the so-called FAANG companies at the time of this writing represent the hottest companies on earth:

[image error]FAANG is an acronym that comprises the hottest tech companies’ stocks. Those are Facebook, Amazon, Apple, Netflix and Alphabet’s Google. The term was coined by Jim Cramer, former hedge fund manager and host of CNBC’s Mad Money and founder of the publication TheStreet:

Why is it so? If we look at each of those companies, there are a few things to notice.

Netflix business model innovation (case study)

Netflix has been able for the first time to move the needle of “culture creation” from Hollywood to the Silicon Valley. While today Netflix invests billions in creating original content which is also what makes it so successful today.

Netflix main contribution is in its business model innovation. Where people hated so much Blockbuster’s late fees, Netflix introduced a new way of renting movies. Initially, Netflix had found its perfect medium of delivery of its new subscription business model via DVDs.

Where Netflix wasn’t able to compete with established Blockbuster, it needed to rethink the way it delivered its service. Thus, in exchange for a fixed monthly fee, people could rent as many movies as possible, with no late fees!

While the new technology of DVD allowed Netflix to deliver a better service. In the end, Netflix had to wait for more than a decade before streaming would pick up.

Therefore, Netflix’s CEO and founder set out to wait for Moore’s law to make streaming possible. Today streaming is the key delivery channel of Netflix service.

Amazon business model innovation (case study)

When Amazon started as internet store, its founder Jeff Bezos started from a niche, books. Rather than trying to sell everything to everyone (that would happen later on), Amazon began to form one relatively smaller market, dominated it and then moved on.

Once again, while Amazon invested from its early years in infrastructure and technology, it also shifted the conventional business model for publishing upside down.

On Amazon, you could find an extensive collection of books, at a lower price compared to physical bookstores. Thus, the initial value proposition was convenience.

Amazon cut off its margins by putting up a cash machine business model, or a model where the company lowers its profitability but generates a lot of short-term cash flows in return.

People could pay for a book right away, Amazon would have delivered, and would pay its vendors later on. The model worked because people could get any book they wanted at a lower price.

Vendors could have higher exposure and visibility through Amazon store, and Amazon, in turn, would use all the additional short-term cash to invest in the growth of the organization.

This process performed many times over, for over two decades Amazon has expanded to sell anything. It also allowed the company to create a few other businesses (AWS, Prime and Physical Stores) that run at high profitability compared to the online store!

Once again, it all starts from business model innovation. Technology is an enhancer of this process but not necessarily what makes the real difference in the outcome.

Apple business model innovation (case study)

When Steve Jobs went back to Apple the company needed to be rebuilt from its ashes. Sales were plummeting, too many unsuccessful products had been introduced.

As soon as Jobs joined Apple again, it made sure to cut and simplify the product offering, but most importantly it started to create the infrastructures that would make its products successful: iTunes for the iPod and the App Store for the iPhones.

Those devices are great, but without an environment made of developers willing to create interesting applications for the iPhone, or if people had to pay for entire albums to listen to in the iPod.

Apple changed the way music was consumed, and it created a whole new industry with its smartphone. Also here, sales didn’t pick off because of great devices, powered by a suitable software (that of course contributed) but the business model crafted by Jobs and his team created commercial viability of those products and a massive amount of traction!

Google business model innovation (case study)

When Google launched its search algorithm proved to be quite good compared to other search engines. For one thing, Google didn’t look spammy with all the ads other search engines provided, and it was quite fast.

The tool was free, and it made it scale quickly. However, it wasn’t until Google figured out a new business model for advertising that revenues took off. Indeed, at the time Google combined its technology with a business model first crafted by a – at the time – Google’s competitor, called Overture.

Overture for the first time had introduced a system of auctions for advertising, which had proved quite successful. Yet Google took that model and improved on it with its seamless advertising machine (Google AdWords, now Google Ads).

When Google introduced a mechanism of ads based on auctions and introduced a quality score. This is a 1/10 scale rating comprised of components like expected clickthrough rate, ad relevance, and landing page experience.

This means that ads weren’t only judged on the price paid by the business but also if that ad was relevant. In 2017 Google had generated over a hundred billion dollars in revenues from advertising!

Also here, a great technological product without a proper business model would have been doomed.

Facebook business model innovation (case study)

When Mark Zuckerberg came up with Facebook in its dorm room, it wasn’t the first social media network. Yet it grew exponentially over the years. While Facebook managed to grow very fast thanks to investments and a free model initially.

It then transformed its social network in targeted ads money-making machine. Facebook at the time of this writing is among the most profitable companies in the world, and still among the most popular apps.

Other social media applications, like TikTok, are trying to disrupt it. Facebook has managed over the years to build a strong brand, and it figured how to monetize the so-called “social currency.” In short, companies and marketers pay Facebook to gain visibility on the platform.

That visibility is sold in the form of impressions, clicks or other actions people can take on a targeted ad! Facebook hidden revenues business model has proved the only worthy competitor to Google advertising business.

Is business model innovation for anyone?

In theory business models innovation is for anyone. Think of the case of a small consulting business that operates in a traditional industry, where most of the competitors charge by the hour.

Yet instead of keeping to do that the small consulting business starts only to charge a small retainer and a success fee. This kind of model might be not financially viable at the beginning, but it might wipe out competitors over time.

Indeed, with a larger customer base, the retainer becomes an essential base for the company’s revenues. And the success fees the scalable part of the business.

In other cases though, business model innovation might require massive financial resources. Think of a business that decides to dominate an existing industry, and it does that by introducing an innovative business model that grows at a reckless pace.

That pace might be attractive for investors looking for high returns on their investments, while it might also burn a lot of cash!

Do you have business model innovation examples you want to share with us? Comment below or send us an email at fourweekmba@gmail.com

Other resources for your business:

Learn how tech companies business models work and the lessons you can learn to scale up your own company:

How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
The Trillion Dollar Company: Apple Business Model In A Nutshell
How Does Netflix Make Money? Netflix Business Model Explained
How Does Google Make Money? It’s Not Just Advertising!

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Published on January 08, 2019 11:36

January 7, 2019

TikTok Business Model: The Rise Of Creative Social Media Powered By AI

TikTok is a creative social media platform primarily driven by short-form video content. It launches challenges of various type to tap into the creativity of its users and generate engaging (if not addicting content).

These challenges are accompanied by compelling music tracks embellished via effects and filters, and powered by AI algorithms that optimize both content creation, curation and recommendation.

The company had grown exponentially and reached over five hundred million users at the beginning of 2018. Facebook has taken notice and might be building its own version, called Lasso!

The Chinese newcomer in the creative social media space

TikTok might be defined as a creative social media or a content platform that taps into the creativity of its users through a set of challenges of various types, to generate engaging content. TikTok has a few main characteristics:

Classic social media platform leveraging on the willingness of people to share their content
Combined with compelling music tracks as the companion to the challenges set on the platform
A set of compelling filters and effects that can be applied to the videos
And an Asystemem as content curation and recommendation

In short, it is a mixture of Instagram, Facebook, and YouTube powered by AI.

If you look among the list of Unicorn Startups for 2019 according to CB Insights, you’ll find out a company called ByteDace. Among others, the company owns a social network called TikTok.

ByteDance at the time of writing has a $75 billion valuation. TikTok is a Chinese company, which offers short-form mobile videos. If you type “TikTok” on YouTube, you might also find some of the videos that invaded it.

What’s so unique about a company that has racked up over half a billion users globally? Which has become among the most valuable Startups, owned by a Chines tech company?

TikTok business dissected

Bloomberg reported that ByteDance, the company that owns TikTok had closed a round of funding from SoftBank and other investors totaling $3b, with a valuation of $75b. CB Insights estimated Byedance as the most valuable Unicorn, which also surpassed Uber.

As pointed out on TikTok site, “TikTok is a destination for short-form mobile videos. Our mission is to capture and present the world’s creativity, knowledge, and precious life moments, directly from the mobile phone.

TikTok enables everyone to be a creator, and encourages users to share their passion and creative expression through their videos.”

That doesn’t seem to be anything special about it, if not the fact that TikTok aim is really to tap into people’s creativity.

Yet to understand why TikTok might be unique, we’ll need to look under the hood, at the company that controls it: ByteDance.

ByteDance, the company behind TikTok

ByteDance was founded by Yiming Zhang, which ByteDance website defines as “A lifelong entrepreneur before ByteDance Yiming founded several ventures including a real estate search portal.

Previously, he served as the Director of Technology at Kuxun, then the dominant travel and transportation search engine in China, where he led a team of more than 40 engineers. Kuxun was later acquired by TripAdvisor.”

The real-time network calculator from Forbes assigns to Yiming Zhang a net worth of $6.8 billion in January 2019. One of the most incredible aspects of this rise is that ByteDance has been able to get so far, even though it didn’t get money from China’s duopoly Alibaba-Tencent.

ByteDance found itself in a legal battle where it alleged Tencent and Baidu to have unfairly competed against one of its most popular apps in China, called Toutiao.

What is ByteDance’s mission?

As announced on its site, the mission ByteDance:

Our vision is to build global creation and interaction platforms – we aim to not just deliver information but serve as a creative hub, hosting and nurturing creators. This belief guides our strategy in product development. Alongside our flagship product Toutiao, the largest content discovery and creation platform in China, we have also developed a diverse portfolio of products that are popular around the world, most notably musical.ly and TopBuzz.

ByteDance offers a series of products, and in China, its most popular one is called Jinri Toutiao (“Today’s Headlines”), which is a news aggregator.

The company claims that it uses AI to tap into the habits of users and to curate content from publishers. While it’s hard to verify how much AI is really at the core of Toutiao success, the company kept growing and fast pace.

And ByteDance has become among the largest content platforms globally.

The content hub powered up by machine learning

One of the main features of social media is content generated by its users. In short, a large number of users create a vast amount of content for free to the platform:

ByteDance has accumulated a vast amount of content and social media created by people and rich engagement data across our various products. This massive data is fed into our machine learning algorithms, which further refines the quality of users’ content feed and enhances the content experience, which in turn encourages more engagement and generates more data to be fed back into our algorithms. We use this virtuous cycle to optimize every stage of the “content lifecycle”—creation, moderation, curation, recommendation and interaction.

In short, ByteDance platform claims to use machine learning and AI on both sides of the content spectrum. In terms of consumption things like feeds, channels, apps and entry points are assessed and assisted by the AI. In terms of content creation, AI supports in the production of articles, images Q&As, video, and live sessions.

The mechanism is summarized below:

[image error]

Source: bytedance.com/ai

Thus, the AI works on several phased of the content experience lifecycle:

creation
moderation
and interaction

TikTok is known in China as Douyin, and it allows users to create unique 15-second short videos, by applying effects that get shared across the world.

TikTok merge with Musical.ly accelerated growth
In 2018, TikTok merged with Musical.ly, a popular mobile platform for short-form video. When the merge happened this is how Bytedance announced it:

We are delighted to welcome musical.ly to the Bytedance family. Louis, Alex and their team have built a hugely powerful and engaging platform, and we see immediate and exciting opportunities to build on the obvious synergy with our business. y integrating musical.ly’s global reach with Bytedance’s massive user base in China and key Asian markets we are creating a significant global platform for our content creators and brands to engage with new markets. At the same time, our global-leading AI technology will help musical.ly to accelerate their incredible pace of innovation in mobile video creation.

How much is ByteDance worth?

According to Bloomberg, the company made $2.5 billion in revenue in 2017. According to CB Insights, the company is valued at $75 billion, right above Uber.

How does TikTok make money?

According to Crunchbase makes one million dollars annually. However, looking at profits isn’t the right metric, as TikTok is grabbing market shares away from other popular social media.

Therefore, at the time of this writing, the company is aggressively investing in growth, and it seems it is gaining in popularity:

A few potential monetization strategies might be:

Advertising revenues generated via targeted ads (similar to YouTube)
Allowing content creators to monetize their content as a user-generated platform is critical to the platform long-term success
A subscription model for original, more extended form content from the platform that assembles the best short-form content

TikTok growth plan

In early 2018 TikTok has gathered over five hundred million users, its growth has been so fast that Facebook has taken notice.

Indeed, according to TechCrunch Facebook is building an app called Lasso to compete against TikTok and stop its massive growth.

Given TikTok presumably multi-billion firepower, it won’t be easy for Facebook to stop TikTok growth.

As of the time of this writing, TikTok seems to be following users of a specific demographics around the web via paid ads. Be it a YouTube, Google or Facebook ad, TikTok appears to be ubiquitous.

This is blitzscaling in action. In an industry, where a few players like Facebook dominate, having a relentless growth is critical to gain enough momentum to survive from a possible attack.

As Facebook is also investing in its own creative social media app, it makes sense that TikTok is pushing so much on growth.

However, this strategy is also hazardous, as when fuels start to run over, either the company will be able to get another round of investing and keep better monetizing its products, or it might risk falling.

What’s most important about TikTok is its research lab, what ByteDance calls “AI Lab” which claims expertise in several areas, from natural language processing (NLP), computer vision, machine learning, and more:

[image error]

Source: ailab.bytedance.com/research

For instance, in the NLP areas, ByteDance has created applications like:

Byte Translator: the machine translation service for all ByteDance products
Xiaomingbot: a robot writer for sports, finance, housing, worlds highlight, etc.
Search for Toutiao and Tiktok (Douyin)

Will TikTok be able to sustain its growth at the point of becoming the dominant creative social media?

How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained

Other resources for your business:

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Published on January 07, 2019 14:12

January 5, 2019

KaiOS Feature Phone Business Model And Why It Matters So Much

KaiOS is a mobile operating system built on the ashes of the discontinued Mozilla OS. Indeed, KaiOS has developed a robust standalone mobile operating system that turns feature phones (so-called “dumb phones”) into smartphones-like phones.

As feature phones powered by KaiOS have access to mobile apps, connectivity and voice search. KaiOS feature phone business model wants to bring connectivity and the digital revolution to those developing countries (like India and Africa) that have missed out on the smartphone wave due to too high costs of those devices.

Besides, KaiOS might be well suited for the IoT revolution!

Background story

A few years back the Mozilla Community created B2G OS (Boot to Gecko), a standalone operating system. That project was discontinued but being created by Mozilla; all its code was open source. From that open source code starts the story of KaiOS.

In 2016 A San Diego-based startup, KaiOS started its take over of the mobile operating system market (in particular India) with a “fork.” In GitHub (a software development platform) a fork is the copy of a repository (a digital directory where you can access a project and all its versions).

Thus, a discontinued project (Mozilla’s B2G OS) became the foundation for KaiOS. Today KaiOS has become the operating system of former “dumb phones” (so-called feature phones) that this mobile operating system transforms into smartphones!

Indeed, KaiOS gained a 15% market share in India in a very short period according to DeviceAtlas. A primary reason for Its popularity was the success of the “Jio phone” which came prepackaged with KaiOS.

Fast forward 2018, Google invested 22 million dollars in KaiOS and for a few good reasons. But before we get to that, let’s look at KaiOS and what makes it so unique.

A glance at the feature phone market

A feature phone is usually defined as a phone that lacks the capabilities of a smartphone. In short, that is the phone we knew before smartphones became the norm:

[image error]

Source: indianexpress.com

While those feature phones might well be defined as “dumb phones” they are not such – potentially – anymore. Indeed, what makes KaiOS such an interesting project is that with its mobile operating system can transform a dumb phone into a smartphone.

We don’t see these phones anymore in developed countries (except for Nokia’s Banana Phone). However, the feature phone market is a big one in India and Africa. According to counterpointresearch.com in India, the smartphone market remained flat in 2018 compared to 2017, while the feature phone market grew quite fast.

This makes the feature phone market quite interesting, but there is even more to it in KaiOS case. Let’s first look at this mobile operating system.

KaiOS in a nutshell

As pointed out on KaiOS blog:

At Kai, our goal is to bridge the divide between the billions of people in emerging markets who still don’t have basic internet access, as well as those in more established markets that do. As a result, we will make internet access available to all, regardless of whether people are uncomfortable with advanced technology, don’t own a smartphone, or can’t afford one.

That’s where and why KaiOS started from. KaiOS, therefore, has the objective of allowing people that can’t afford a smartphone to have the same basic features, which will give people using feature phones apps that are also available on smartphones, and even access to voice search.

As pointed out by the KaiOS team, its operating system, while based on Mozilla discontinued project it “has been developed into something much more robust and expanded than the original Firefox OS. Think of us as distant cousins, not siblings nor children.”

The critical ingredient of KaiOS is that it brings “support of 4G/LTE, GPS, and Wi-Fi, as well as HTML5-based apps and longer battery life, to non-touch devices.”

In other words, KaiOS has an optimized user interface which even though brings smart features to “dumb phones” it does that by requiring little battery, memory than another operating system while bringing to those feature phones social media, navigation, and other apps similar to a real smartphone!

Where does the name KaiOS come from?

As reported on KaiOS website, “Kai” originates from the Chinese word for open: 开 (kāi).” Thus, the “open operating system” in the sense of giving final access to billions of people to the digital revolution.

In short, KaiOS brings connectivity to phones that otherwise would have been cut out this revolution. Therefore, more and more people in emerging and developing countries will finally have that access.

KaiOS market share

According to gs.statcounter.com KaiOS has become the third mobile operating system worldwide:

[image error]

Its success can be primarily attributed to the success of the JioPhone, a feature phone which sold pretty well in India. This partnership was further sealed when in 2018, Reliance Retail, the consumer goods arm of Reliance Industries bought 16% of KaiOS.

As reported on indianexpress.com:

Highlighting the fact that JioPhone is already a meaningful contributor Reliance Jio’s growth, a recent survey estimates that total JioPhones sold so far could be close to around 40 million. A survey by Credit Suisse on the Indian Telecom Sector said as suggested by recent media reports, JioPhone had 36 per cent share of the feature phone market for January-March quarter of 2018 on an expanded market base.

Other devices that are powered by KaiOS are:

Alcatel Go Flip 2
Cat B35
Doro 7050 and 7060
JioPhone (Reliance Jio)
JioPhone 2 (Reliance Jio)
MaxCom 241 and 281
MTN phone
Nokia 8110 (HMD Global)
WizPhone WP006

The Jio Phone partnership has proved quite successful for several reasons, and the primary reason is given by the fact that KaiOS makes available in Jio Phones apps and features available on smartphones. Another compelling reason is voice search!

KaiOS and voice search

An interesting aspect of dumb phones powered by KaiOS is the ability to easily activate the Google Assistant and its voice search capabilities:

This made KaiOS quite appealing to Google!

Google’s investment in KaiOS

As reported on KaiOS blog by Sebastien Codeville, CEO of KaiOS Technologies after the Google $22 million Series A round:

This funding will help us fast-track development and global deployment of KaiOS-enabled smart feature phones, allowing us to connect the vast population that still cannot access the internet, especially in emerging markets

Before we draw some conclusions, let’s look at why KaiOS business model makes sense.

Why KaiOS emerging 3G/4G feature phone business model makes sense

The value proposition of this business model starts with two key players:

the majority of the population in developing countries with a limited budget
and mobile carriers that didn’t manage yet to tap into a good chunk of the developing countries population due to lack of connectivity and income

KaiOS solves both those issues by:

allowing dumb phones to become smart and therefore allow people that can’t afford a smartphone to finally have the same features at a fraction of the price
allow mobile carriers to tap into the developing market

This happens because a substantial user base (those that own feature phones) is still stuck on 2G networks, which makes it hard for them to sell other lucrative data plans on mobile services.

[image error]

Source: kaiostech.com

According to KaiOS, this business model goes through a few steps:

lower device costs
limited data costs by offering data plans that are cheaper than a regular smartphone plan
restricted data usage by making lite versions of apps and sites
data rewards by triggering ad campaigns on those devices that also give free data usage back to users

If this business model works out this might finally allow mobile devices, internet access, mobile apps, and mobile carriers to penetrate at a global level.

Let’s look now how this might fit into Google masterplan.

Voice search data

As KaiOS device carry a Google Assistant, it will be easier for Google to consolidate its position in voice search in the developing world.

Tapping into the lower-hand phone market with the highest growth potential

As the feature phone market is growing at a fast rate, this will allow Google to have its apps featured in those phones, which in turn will guarantee the access to millions of users in those developing countries.

KaiOS as an avenue toward IoT

KaiOS is also well suited as a potentially disruptive operating system toward IoT. As it makes of its ability to work on devices that require limited connectivity and low consumption of both data and battery.

This might make it easier for KaiOS to become the predominant operating system for objects that surround us and that might give rise to the IoT revolution. If Google were able to put its hands on that, it would allow the company to conquer the next stage of the web.

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Published on January 05, 2019 18:00

Visualizing Facebook ARPU Over The Years And Why It Matters

In the infographic above you can appreciate Facebook growth in ARPU over the years. ARPU or average revenue per user is a critical metric to understand how Facebook monetizes and has monetized its users over the years.

As the Facebook business model is primarily powered by advertising, failing in monetizing its users, by selling them targeted ads would mean a failure in its overall business model.

In fact, rather than becoming less relevant, advertising revenues in proportion to other monetization strategies have grown over the years and in 2017 represented more than 98% of its revenues:

[image error]

Revenues from advertising, at least as of the third quarter of 2018, seemed to be driven by mobile advertising, which contributed to most of Facebook revenues.

I took a long-term perspective on how the company has grown its monetization strategy over the years.

After an inflection in the first quarters of 2018 in the US & Canada, Facebook seems to be growing again, Especially in these two countries, which still represents the most important markets. While in Europe’s growth has flattened:

[image error]

What, if any, can we notice from those numbers?

Facebook (for now) solid business model

Besides that buzz and voicing that Facebook would soon be doomed, the company has gone through it (at least for now) successfully.

However, it is important to notice that the Facebook business model relies on several products (like Messenger, Instagram, and Whatsapp).

This leads us to the second point.

Facebook acquired users by acquiring companies

In general, companies can execute several business strategies to keep growing their users’ base. In particular, Facebook has been acquiring other companies, when they were still in a startup mode; and paid them at a relatively low price (at hindsight) compared to what those companies have meant in terms of monetization strategy in these days.

For instance, Facebook owns several companies and products, some of them are:

Messenger
Instagram
WhatsApp
Oculus
Masquerade

Each of those companies has been critical in terms of Facebook ability to keep monetizing the data from its users.

As Facebook points out on its website:

In accordance with their respective terms of service and privacy policies. We may share information about you within our family of companies to facilitate, support and integrate their activities and improve our services.

Which means Facebook can better sell targeted ads to users, and monetize those ads by having marketers and companies pay for eyeballs.

For instance, when Facebook acquired Instagram for a billion dollars, it might have seemed too expensive, for a company that didn’t turn a dime.

Yet as of today, most Facebook revenues are coming from advertising on mobile devices (mobile was Instagram strength and Facebook weakness).

While we don’t know for sure the breakdown of revenues coming from advertising on Instagram (Facebook doesn’t officially report it) it might be possible that Instagram has driven a good chunk of the revenue growth in the last years.

Facebook so far has made just the right acquisition at the right time to move to the next stage of the web.

That is also why it acquired Oculus (a VR device) and Masquerade (face tracking app that offers three-dimensional animations to users’ faces). We’ll see if those moves will turn out to be successful for the coming years.

Beware of power users

ARPU doesn’t capture what I would define power users (those that are worth the most to the platform based on how much they use it and engage with it). In short, Facebook might be described as a marketplace for attention, some users are just average, while a very few are power users and they do make a difference to the overall company’s strategy.

While Facebook doesn’t disclose the demographic of users that are worth the most, they might have internal metrics that help them navigate through their long-term strategy and how to keep those power users engaged.

Not all users are born equal

When you look at Facebook ARPU, one thing is clear; not all users are born equal. Users’ monetization primarily depends on ads budgets in each country.

It is clear that countries like the US and Canada have way higher ads budget, also given their higher GDP per capita, compared to other countries from Asia or Eastern Europe.

That is also why the ARPU for other geographical areas is way lower.

This brings us to the next point.

US & Canada are still the ones worth the most to Facebook yet its penetration might be well over

The US represents the critical country for Facebook‘s revenue and its monetization strategy. While its ARPU has also grown in 2018, the user base has pretty much stalled.

Facebook users for US & Canada have fluctuated around 241-242 monthly active users in 2018, a 1.2% increase compared to 2017. Yet its revenues have increased by 33% in the third quarter of 2018, compared to the third quarter of 2017.

That might be driven by increased budget in mobile advertising.

The penetration of Facebook in the US has reached 72.4% according to internetworldstats.com. This makes it hard for Facebook to expand further in terms of users’ base.

Data has a value in its own sake

Besides the $ value in terms of monetization, analyzing the data based only on the ARPU is quite limited.

Indeed, even though Facebook doesn’t yet make much money with its users outside US, Canada, and Western Europe, it still collects data, that makes the platform grow and become better and stronger over time.

While Facebook still faces operating costs of running its servers and platform in those countries, this cost is financed by other countries (like the US) that bring in revenues at a substantial margin for Facebook.

Indeed, Facebook enjoys incredible profit margins, that make it one of the most profitable tech companies:

[image error]

From whatever perspective you look at Facebook, the company it’s and has been a goldmine to its investors.

Thus, when and if Facebook will be able to monetize those users around the world, and in emerging markets, it might turn out to be even more profitable (assuming Facebook business model will hold over time).

Resources for your business:

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Published on January 05, 2019 12:45

January 4, 2019

Why Amazon Is Doubling Down On AWS

Back in the year 2000, Amazon business model was facing scalability issues, primarily due to its massive infrastructure growth. More precisely Amazon was looking for a way to allow merchants to build their own e-commerce on top of Amazon. This would later become the critical strength and competitive advantage for Amazon.

That is also why with “really no fanfare” Amazon started to put together the infrastructure that would later become Amazon AWS. Today Amazon AWS is a company’s separate segment, and it made over seventeen billion dollars in revenues!

Amazon AWS expenses are primarily comprised of its technology and content costs. Throughout the years, Amazon has doubled down on that:

[image error]

Amazon specified in its annual report Amazon AWS “increased spending on technology infrastructure and sales and marketing expenses and related payroll, which was primarily driven by additional investments to support the business growth.”

By looking at Amazon‘s revenue model over the years, it is easy to appreciate how Amazon AWS has grown in importance for the overall Amazon business model:

[image error]

As pointed out on Amazon Annual Report for 2017:

It’s exciting to see Amazon Web Services, a $20 billion revenue run rate business, accelerate its already healthy growth. AWS has also accelerated its pace of innovation – especially in new areas such as machine learning and artificial intelligence, Internet of Things, and serverless computing. In 2017, AWS announced more than 1,400 significant services and features, including Amazon SageMaker, which radically changes the accessibility and ease of use for everyday developers to build sophisticated machine learning models. Tens of thousands of customers are also using a broad range of AWS machine learning services, with active users increasing more than 250 percent in the last year, spurred by the broad adoption of Amazon SageMaker. And in November, we held our sixth re:Invent conference with more than 40,000 attendees and over 60,000 streaming participants.

With the AWS segment, Amazon serves “developers and enterprises of all sizes, including start-ups, government agencies, and academic institutions, through its AWS segment, which offers a broad set of global compute, storage, database, and other service offerings.”

The interesting part of Amazon AWS is that opposite of its core business model (online store), this segment runs at high-profit margins.

For instance, by comparing the revenues and operating income growth over the years, you can appreciate how the cost structure for Amazon AWS gets better over time:

[image error]

That is also shown in its operating margins over the years: [image error]

As reported on its annual report the increase in “AWS operating income in absolute dollars in 2016 and 2017, is primarily due to increased customer usage and cost structure productivity.”

That makes it easy to understand why Amazon is doubling down on its AWS business segment!

As explained by Andy Jassy, Amazon AWS CEO, in a 2017 interview on Forbes:

If you look at what’s happening in the enterprise and the public sector over the last two to three years, it’s exponential and dramatic for AWS,” he says. “You can see it in really every imaginable vertical business segment. So it’s not like these enterprises are running just a couple applications. We have an $18 billion revenue run rate. You don’t have a business that big just on startups. We’re just at the beginning of mainstream enterprise mass migration to the cloud.

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Amazon AWS
2013
2014
2015
2015
2016
2017

Revenues
3,108
4,644
7,880
7,880
12,219
17,459

Operating Income
673
660
1,863
1,507
3,108
4,331

Operating Margins
21.7%
14.2%
23.6%
19.1%
25.4%
24.8%

Source: Amazon Annual Report 2017

Source: Amazon Annual Report 2015

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Published on January 04, 2019 14:13

January 3, 2019

How Much Is Facebook Really Worth To Users?

Facebook is worth on average over $1000 on a yearly basis for its users according to a study conducted by Jay R. Corrigan, Saleem Alhabash, Matthew Rousu, Sean B. Cash, entitled “How much is social media worth? Estimating the value of Facebook by paying users to stop using it.”

Facebook, like Uber?

A social network is not far from a two-sided marketplace. Yet, instead of enhancing real value, people exchange social value, in the form of social currency (be it likes, shares, and comments).

Therefore, my argument is to understand the real value of a social media platform; it is critical to understand how much are users worth to it. However, there are two kinds of users: average users and power users.

I argue that like in a marketplace, where one side of the market wants a service in exchange for money, the other side offers that service for money.

Think of the Uber business model. On the other hand, you have riders who pay for getting a ride. On the other hand, you have drivers, who drive in exchange for money.

In the context of social media – I argue – that average users are like riders. They are willing to give money.

On the social platform money is anything that has social value (likes, shares, and comments) while power users are the drivers, those who offer services like sending friends requests and posting updates.

Bear with me, as there isn’t a clear-cut distinction between average users and power users. Average users can sometimes turn in power users, just as riders can sometimes decide to drive.

But just like drivers are the key to keep the two-sided marketplace of Uber successful in the long run (that is why Uber is eager to invest in self-driving cars), so power users are the most valuable assets for Facebook.

In a previous article I looked at how much you’re worth to Facebook by looking at a fundamental metric Facebook tracks, which is called ARPU:

[image error]ARPU or average revenue per user is a critical measure to assess Facebook ability to monetize its users. ARPU is given by total revenue in given geography during a given quarter, divided by the average of the number of monthly active users in the geography at the beginning and end of the quarter.

While of course, ARPU is a good metric to have a rough understanding of Facebook economics. It’s still a very rough metric. Why? It is a metric that relies on averages.

And like all metrics that rely on average, it doesn’t capture the value of the users that are worth the most to Facebook, the so-called power users.

As seen above power users are those that love Facebook so much or that use it professionally, that doesn’t just scratch the surface of the social network.

They know all the features, they engage with the community. They engage the community. They create quality content for free for Facebook, while asking for nothing but likes.

We can argue that power users are those that keep Facebook strong and alive. As a study published by demandforce.com pointed out that only as few as 5% of Facebook members are power users on all its activities (things like adding friends, tagging people, sending friend requests and so on).

We don’t know those power users, as Facebook doesn’t disclose them in its financials, but they are hidden gems for social media platforms. Those power users are what keeps Mark Zuckerberg falling asleep with the smile on his face.

Those power users might also be what makes overall Facebook valuable on the one hand. And even those people that would never give it up.

As we’ve already answered the question, how much are you worth to Facebook?

Let’s flip it up, and look at the other side of the coin.

How much is Facebook really worth to users?

How Much Is Facebook Really Worth To Users?

In a study entitled “How much is social media worth? Estimating the value of Facebook by paying users to stop using it” published by Jay R. Corrigan, Saleem Alhabash, Matthew Rousu, Sean B. Cash.

As pointed out in the abstract they used a simple methodology “We report the results of a series of three non-hypothetical auction experiments where winners are paid to deactivate their Facebook accounts for up to one year.“

The paper also explains:

In this paper, we use experimental auctions to directly estimate the value U.S. users place on Facebook. Auction winners were paid to deactivate their account for as little as one hour or as long as one year. Because auction participants faced real financial consequences, they had an incentive to seriously consider what they would need to be compensated to go without the service for the time period specified. Though auction procedures and subject demographics varied across our four samples and different procedures, we consistently find that our 1,258 auction participants derive over $1000 of value annually on average from Facebook, reinforcing the idea that the computer age’s effect on society’s well-being is much larger than its effect on GDP.

In short, according to the study the over $1000 of value annually on average from Facebook. That is also confirmed by the fact that Facebook has been able also to improve its monetization thanks to mobile advertising:

[image error]In the first nine months of 2018, mobile advertising was estimated at 92% of the total advertising on Facebook products. Active monthly users decreased from 376 million to 375 million in Europe. In the US and Canada, users increased from 241 million to 242 million. At the same time, average revenue per user grew worldwide. Besides all the buzz of 2018, the Facebook business model seems (for now) unshakable.
Key takeaways

As pointed out in the study, “Facebook remains the top social networking site in the world and the third most visited site on the Internet after Google and YouTube” and it goes on “If Facebook were a country, it would be the world’s largest in terms of population with over 2.20 billion monthly active users, 1.45 billion of whom are active on a daily basis, spending an average of 50 minutes each day on Facebook-owned platforms (e.g., Facebook, Messenger, Instagram).“

These findings point out a few key aspects, from the business standpoint:

A free tool has a wider economic impact that can be captured by standard measure (like GDP or ARPU) as Facebook with a relatively low employees base has a sizeable cultural impact
Nonetheless, several scandals, and comments about Facebook, if the study turns out to be correct in the long-run Facebook might be way more robust that it’s perceived
Social capital might need a good and solid metric on its own to be really assessed
To understand the value of digital platform, it becomes critical to be able to asses rigorously its economic value based power users
A social media platform might well be defined as a two-sided marketplace with similar logic to a real marketplace where in exchange for real value people exchange social value. While nothing new to it, that social value though might have a consistent basis in the “real world” and a higher impact that usually thought

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Published on January 03, 2019 11:51

December 30, 2018

Jeff Bezos Teaches You When Judgment Is Better Than Math And Data

Back in 2005, Amazon.com had already become a massive success. A website, turned into a bookstore with a wide selection of books, had started in July 1994.

By 1995 it had sold already half a million worth of inventory. Its growth was exponential and by 1997 sales skyrocketed at over a hundred forty-seven million dollars!

The escalation continued, and by 2005, Amazon.com had evolved in a store offering a wide range of products, from books to music.

Amazon had started from a niche, which had dominated and quickly expanded. Indeed, in 2005 the company had sold almost eight billion and a half worth of goods!

To indeed get Amazon’s growth, let’s visualize it:

[image error]

A company that had started as a bookstore, challenging existing giants (like Barnes & Noble) had become a recognized brand not only in the US but also in Europe.

Why not stop there? Yet in 2005, Amazon kept making hard choices. For instance, the company launched a program called Amazon Prime.

Why Amazon Prime was a controversial judgment call rather than a quantitative analysis

As Jeff Bezos recounted back in 2006, “many of the important decisions we make at Amazon.com can be made with data. There is a right answer or a wrong answer, a better answer or a worse answer, and math tells us which is which. These are our favorite kinds of decisions.”

Indeed, Amazon had always been more of a tech and software company than a retail store. If all Amazon had turned the retail store business model upside down.

Where retail stores would focus either on lowering prices or customer experience. Amazon obsessed on both.

Amazon turned to quantitative analysis each time it had to make critical operating decisions related to the business.

For instance, as pointed out back in 2006, when it came to deciding whether to open up a new fulfillment center Amazon used historical data to estimate seasonal peaks and to model alternatives for new capacity.

It also looked at shapes, dimensions of products to optimize its fulfillment capacity. Or computed and shortened with maximum precision, the outbound transportation costs, based on the proximity of customers.

In short, in making decisions, Amazon is more of a lab made of scientists relying on data and math than a company relying on human judgment.

However, as Jeff Bezos admitted back then, there were certain kinds of decisions that cannot be modeled and made through math and data.

Nonetheless, massive growth, for instance, in 2005 Amazon had launched Amazon Prime. And there was no way to assess quantitatively, whether that initiative would have been successful.

Fast forward 2017, Amazon Prime has become a key ingredient to Amazon business model mix:

[image error]

While it is easy to be fooled by the fact that as of now Amazon Prime only represents over 5% of Amazon’s revenue streams. However, Amazon Prime is a key ingredient to the overall Amazon success.

With Prime, Amazon can hook customers to purchase more things in the online store. While they also pay a subscription fee that makes Amazon revenues more predictable and at higher margins, compared to the online store.

Amazon Prime was as 2017, together with other subscription services, an almost ten billion dollars business!

Short-term, operating decisions, based on quantitative analyses, and long-term, strategic decisions based on opinion and judgment

Indeed, opinion and judgment, in that case, mattered way more. As Jeff Bezos recounted in 2006:

As our shareholders know, we have made a decision to continuously and significantly lower prices for customers year after year as our efficiency and scale make it possible. This is an example of a very important decision that cannot be made in a math-based way. In fact, when we lower prices, we go against the math that we can do, which always says that the smart move is to raise prices. We have significant data related to price elasticity. With fair accuracy, we can predict that a price reduction of a certain percentage will result in an increase in units sold of a certain percentage. With rare exceptions, the volume increase in the short term is never enough to pay for the price decrease. However, our quantitative understanding of elasticity is short-term. We can estimate what a price reduction will do this week and this quarter. But we cannot numerically estimate the effect that consistently lowering prices will have on our business over five years or ten years or more. Our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon.com. We’ve made similar judgments around Free Super Saver Shipping and Amazon Prime, both of which are expensive in the short term and—we believe—important and valuable in the long term.

In particular, Jeff Bezos cited a paper called “The Structure of ‘Unstructured’ Decision Processes” published in 1976 by Henry Mintzberg, Duru Raisinghani, and Andre Theoret.

More, in particular, the paper highlighted how, when an institution made decisions, primarily based on data and math, that made them take efficient operating decisions.

Yet, as long-term, strategic and “unstructured” (based on processes that have not been encountered in quite the same form and for which no predetermined and explicit set of ordered responses in the organization) decisions, might not rely on quantitative understanding, will get underestimated.

That happens, because decisions that can be taken on a quantitative basis can be measured, thus institutions but also companies and managers in the field focus too much on measurable analyses.

Yet while those decisions might be good for the short-term. They might prevent an organization to focus on long-term, hard and strategic decisions.

Amazon, a company that relied over and over again on quantitative analysis of things that could be measured, optimized and maximized.

Also relied a lot on judgment, opinion, and human decision-making when it came to long-term, strategic decisions, that could not be based on previous experience or scenarios, but needed to be tackled.

This point is very important. In a world of management that focuses more and more on the quantifiable, and measurable. Getting data-driven might mean losing the strategic focus.

How did Jeff Bezos as manager and executive and Amazon as company handled it?

You just need a simple framework, made of a few core principles for your strategic decisions, and you need to stick to them!

Amazon laid out the foundation of its decision-making process, based on few key principles, defined in 1997, in the first Shareholders letter:

We will continue to focus relentlessly on our customers.
We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns, and to step up our investment in those that work best. We will continue to learn from both our successes and our failures.
We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.

Those bold decisions that made Amazon the company we know today were not based on quantitative analyses but rather on controversial human judgment.

The compass for Amazon was based on customer focus, long-term game, launching programs fast and killing them even faster, invest massively in areas where the company sees a sufficient probability of gaining market leadership!

Key takeaway

Where managers and practitioners get bogged down by complex and quantitative analysis to make short-term decisions.

In reality, companies like Amazon did rely on those quantitative analyses to make short-term decisions to maximize their fulfillment centers, the shapes of their products, the shipping time and so on.

However, a whole new set of strategic and unstructured decisions that could not rely on math and data (like the launch of Amazon Prime) were made based on human judgment.

To make these decisions, Amazon defined since the start a clear framework, based on a few guiding principles.

If you want to make an impact on your organization you need to have that framework ready each time math and data can’t help you out!

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