A review of the major business models in use in the consumer technology market, and the keys to success for consumer technology companies. This deck is a shortened version of a longer deck which I regularly present to consumer technology companies and which includes analysis and advice on how they should evolve their businesses given the trends outlined in the deck. A customized presentation is one of the paid services Jackdaw Research offers: please contact me if you would like to know more about this.
2. About this deck
• This deck is a shortened and simplified version of a longer deck that I present in
person to consumer technology companies and others
• It is based on the work and analysis I do at Jackdaw Research in advising major
consumer technology companies, some of which I share through:
• My personal blog: www.beyonddevic.es
• My Techpinions columns: https://techpinions.com/author/jandawson
• I’m open to presenting the longer deck in person for a fee – please contact me
for pricing (contact details on the title slide)
• You may embed and download this deck as you wish, but please attribute it to
Jan Dawson, Chief Analyst at Jackdaw Research and link to
www.jackdawresearch.com
3. Key ideas
• Successful consumer technology companies increasingly share these
characteristics:
• A highly profitable core business
• Competition across several key domains and the creation of ecosystems
• Successful use of monetized and non-monetized business models to
create value across domains
• Despite all this, it is possible for small, focused consumer technology
companies to be successful, though the pull of ecosystem creation is strong
over time
• Major companies have created profitable cores around very different markets
4. Six major domains in consumer
technology
Content Comms ConnectivitySoftwareHardware
Smartphone
Tablet/PC
Console
Smart TV/STB
Wearables
Operating
system
Productivity
Anti virus
Mobile apps
Other
Video
Music
Books
Search
Games
Text
Audio
Video
Social
Photo sharing
Wired
Cellular
WiFi
Satellite
Digital layer
Commerce
Payments
Transport
Hotels
HomeOther
5. Category definitions
• Hardware: the smart devices we use to make use of the rest of the categories
• Software: operating systems, pre-installed and installable software that runs
on smart devices
• Content: the digital content consumers create and consume on their devices
• Communications: the ways in which consumers communicate on their devices
• Connectivity: the wired and wireless connections that allow devices to
engage in the other categories
• Digital layer: products and services which add a digital layer to real-world
products and services, whether commerce, transportation or payments
6. The importance of highly
profitable core businesses
• Successful major consumer technology companies need
highly profitable core businesses, for two reasons:
• These allow the company to invest in its ecosystem by providing
other products and services on a non-monetized (or simply lower
margin) basis while maintaining good overall margins
• They allow the company flexibility to innovate and invest in new
businesses while maintaining good overall margins
• Companies which lack a highly profitable core are unable to
create viable ecosystems and to invest without damaging
profitability
7. Examples of profitable cores
Highly profitable
core
Lower margin
activities
Subsidized
activities
Apple
Hardware, especially
the iPhone
Other hardware,
iTunes, iCloud
OS X, iOS, iWork, iLife,
iMessage
Carriers Voice, SMS Data
Devices, voicemail,
directories
Facebook
Display ads in news
feed
Other ad products
Messenger, Instagram,
Whatsapp, Oculus
Google Search advertising Display advertising
Google Docs, Gmail,
Hangouts, Android
Microsoft Office, Windows
Cloud, Lumia, Xbox,
Surface, Bing
OneNote, Windows
Phone, Cortana
8. Cores are different for different
companies
• Even though each company needs a highly
profitable core, the core doesn’t need to be in the
same area
• Different major tech companies have established
hardware, software, content, communications and
connectivity as their cores
• All have also diversified beyond those cores
9. Expanding from core
Hardware Software Connectivity Comms Content
Apple
Microsoft
Google
Facebook
Digital layer
Amazon
10. Amazon – odd man out
Retailer gross margins, annual
10%
20%
30%
40%
2006 2007 2008 2009 2010 2011 2012 2013
Amazon Wal-Mart Target Kroger
Costco Home Depot Walgreen
Amazon’s core is e-commerce -
essentially retail. But this is an
inherently low-margin business.
Amazon’s gross margins have risen
lately, but only because of non-
retail activities like third-party
sellers and AWS. Amazon’s core
simply isn’t highly profitable, which
is why recent investments and
experiments (such as Fire Phone)
have hurt its overall profitability so
badly.
11. Two basic categories of
business models
• The business models for every consumer tech
company’s products and services may be divided
into two broad categories:
• Those where the product or service is directly monetized
• Those where no revenue is generated from the product or
service directly
• Each of these two categories may be further
subdivided as shown on the next two slides
12. Monetization models
Direct Platform Advertising
Definition
Sell 1st party products
to end users
Sell 3rd party products
to end users
Sell eyeballs to
advertisers
User
Customer
Alignment
100% 50/50 0%
Amazon Kindles E-commerce IMDB
Apple iPhone, iPad, Mac iTunes, App Stores iTunes Radio
Facebook – Payments Core product
Google Google Business Apps Google Play Search
Microsoft Office Windows Store Bing
13. Two flavors of direct
monetization
• Even within the direct monetization model, there are two
distinct charging mechanisms:
• One-off, where a customer makes either single or infrequent
purchases for ownership of a product
• Subscription, where a customer pays a fee on a regular basis (typically
annual or monthly) to rent a product or service (or access to it)
• Across consumer technology, subscription models are
taking over as both customers and providers gravitate
towards them
14. The move to subscription
business models
Old Models:
One-off
New Models:
Subscriptions
Software
Licence purchases, made every
few years, e.g. Windows, Office,
Photoshop
Software-as-a-service, e.g.
Office 365, Adobe Creative
Cloud, Evernote Premium
Devices
Subsidized or in-full purchases
of phones, tablets etc.
Devices purchased on
installment plans through
carriers (or potentially OEMs)
Content
Album, TV show or movie
purchases
Subscription services such as
Netflix, Hulu, Spotify
15. Non-monetized models
Bundling Data Channel
Definition
Part of a broader
product / service
which is monetized
Generates data which
is used to improve
products or sell ads
Provides ways to get
monetized products in
front of end users
User
Customer
Alignment
100% 50/50 0%
Amazon Prime Instant Video Goodreads –
Apple OS, iLife, iWork – –
Facebook Messenger Graph Search Facebook Home
Google Hangouts Google Maps Android
Microsoft Internet Explorer Cortana Windows Phone
16. What is becoming pervasively
non-monetized?
Monetized Non-monetized
Cloud storage Dropbox, Box
OneDrive, Google Drive,
iCloud Drive
Messaging Carriers
iMessage, Hangouts, Skype,
Whatsapp
Operating systems Windows
Chrome OS, Android, iOS, OS
X
Productivity software Office iWork, Google Docs
Photo sharing Flickr
iPhoto, iCloud Photo Streams,
Google+
The companies in the Monetized column need to provide increasingly
strong differentiation to justify charging or shift to other business models
17. User/customer alignment
• Different business models have different degrees of
alignment between users and customers
• Direct business models and bundling have fairly complete
alignment between customers and users: they are one and
the same
• But advertising business models often put users and the
paying customers (advertisers) and their needs in conflict
• Platform, Channel and Data business models can also
create tension between the needs of users and others
18. Where does the money come
from?
Revenue split by business model, last four quarters
0%
25%
50%
75%
100%
Amazon Apple Facebook Google Microsoft
Direct Platform Advertising
19. Business model map: Google
Monetized Non-monetized
Direct Platform Advertising Bundling Data Channel
Google Apps
Nexus devices
Chromecast
Drive
Play Store
Search
Gmail
Maps
YouTube
Calendar
Android
Android Wear
Android Auto
Note: The longer version of this presentation includes similar maps for other companies
20. Is software eating the world?
• Marc Andreessen famously said software is eating the
world, and in a sense that’s true
• More and more things are delivered through software
rather than dedicated hardware
• However, almost all of that software is monetized through
things other than software – whether hardware, associated
services or advertising
• Almost all the “software” being directly monetized on app
stores is made up of games
21. Software eating the world but
being monetized elsewhere
Monetization
Instagram In-app advertising
Office Office 365 subscriptions
Netflix Netflix subscription
Uber Car rides
AirBnb AirBnb accommodations
LinkedIn Recruitment and advertising fees
Pandora Ads and subscriptions
Skype Ads and subscriptions
22. Where’s the revenue?
Content
$650bn
Comms
$1.2tn
Connectivity
$400bn
Software
$100bn
Hardware
$800bn-$1tn
Smartphones
$200bn
Tablet/PC
$400bn
Consoles
$10bn
Smart TV/STB
$150bn
Wearables
<$10bn
OS
$20bn
Mobile apps
$30bn
Productivity
$30bn
Anti-virus
$5bn
Other
$5bn
Video
$500bn
Music
$9bn
Books
$9bn
Search
$60bn
Games
$20bn
Text
$170bn
Audio
$930bn
Video
<$10bn
Social
$20bn
Photo sharing
<$10bn
Wired
$200bn
Cellular
$180bn
WiFi
<$10bn
Other
Digital layer
$1.5 trillion
Commerce
$1.4tr
Payments
~$1bn
Transport
<$5bn
Hotels
<$1bn
Home
<$5bn
Satellite
<$10 bn
Note: These numbers are intended to be ballpark only – I have more detailed breakdowns
23. Where’s the margin?
Content Comms ConnectivitySoftwareHardware
Smartphones
<5%
Tablet/PC
<5%
Consoles
<5%
Smart TV/STB
<5%
Wearables
<5%
OS
30% or n/a
Mobile apps
very variable
Productivity
30% or n/a
Anti-virus
10-15%
Other
–
Video
20-30%
Music
10%
Books
10%
Search
5-25%
Games
5-20%
Text
30-40%
Audio
30-40%
Video
<10%
Social
20-30%
Photo sharing
10%
Wired
20%
Cellular
30%
WiFi
10%
Other
–
Digital layer
Commerce
10%
Payments
5%
Transport
?
Hotels
?
Home
<5%
Satellite
20%
Note: These numbers are intended to be ballpark only – I have more detailed breakdowns
24. Where the money is
Scale
$1.5 trillion
$1 trillion
$500 billion
Operating margins
0% 10% 20% 30%
Hardware
Software
Content
Comms
Connectivity
Digital layer
Note: the dimension not shown here is future changes in both size and profitability
26. A word on ecosystems
• Most of the major consumer technology companies have
built or are building ecosystems
• Ecosystems provide value across domains, devices and
potentially platforms
• They create true synergies – buying into the ecosystem is
better than buying into the sum of its parts because things
work better together
• This means competing across domains, and recognizing
erstwhile partners as potential competitors
27. Competing across the six
categories
Hardware Software Content Comms Connectivity Digital Layer
Amazon
Kindle, Fire
Phone, TV
Fire OS
Instant Video,
MP3, Kindle
–
AT&T 3G/4G
in devices
E-Commerce
Payments
Apple
iPhone, iPad,
Mac, Watch
OS X, iOS,
iLife, iWork
iTunes, App
Stores
iMessage,
FaceTime
–
Payments
HomeKit
Facebook
Oculus, HTC
First
Parse
Auto-play
videos,
photos
Messenger,
Whatsapp
Internet.org Payments
Google
Motorola,
Nexus
Android,
Chrome OS
Play Store,
YouTube
Hangouts,
Google Voice
Google Loon
Google
Shopping
Microsoft
Surface,
Lumia, Xbox
Windows,
Office
Windows
Store, Xbox
Skype – –
29. Competition across four
domains
Microsoft Google Apple
Computing
Windows Phone
Windows 8
Android
Chrome OS
iOS
OS X
Body
Band
Health
Android Wear
Fit
HealthKit
Apple Watch
Car
Windows
Embedded?
Android Auto CarPlay
Home
Xbox
Insteon
Nest
Android TV
HomeKit
Apple TV
30. How big is your ecosystem?
User numbers, billions
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Q3 2008 Q2 2009 Q1 2010 Q4 2010 Q3 2011 Q2 2012 Q1 2013 Q4 2013 Q3 2014
Facebook monthly active users
Amazon active customer accounts
Twitter monthly active users
iOS installed base
Android installed base
31. The pull of ecosystems
• There are obviously successful single-product
companies out there today
• But in order to continue to grow, they inevitably
expand into adjacent markets
• This then causes them to compete with former
partners, and they end up building category,
rather than product, companies and eventually
ecosystems
32. The pull of ecosystems
Content Comms ConnectivitySoftwareHardware
Smartphone
Tablet/PC
Console
Smart TV/STB
Wearables
Operating
system
Productivity
Anti virus
Mobile apps
Other
Video
Music
Books
Search
Games
Text
Audio
Video
Social
Photo sharing
Wired
Cellular
WiFi
Satellite
Digital layer
Commerce
Payments
Transport
Hotels
HomeOther
Text
Audio
Video
Payments
Video
Music
Photo sharing
Apple’s slow transformation into an ecosystem
Tablet/PC
Operating
system
Productivity
Smartphone
Smart TV/STB
Books
Search
Home
Mobile apps
Other
1
2
3 4
56
7
8
9
10
11
12
13
14
15
16
1 These numbers denote the rough order in which Apple has expanded into these areas
33. Key takeaways
• Successful consumer tech companies build
ecosystems around highly profitable cores
• This means competing across multiple categories and
domains to remain successful
• Software may be eating the world, but it’s monetized
through other categories
• There are only a few highly profitable niches out
there, and much else will become free to the user