Business Model Alchemist

I find it fascinating to observe how two industries – the telecom & cable business – are increasingly resembling each other though they function with completely different models. This nicely illustrates what I believe is becoming a strong trend and what I will briefly outline in the following lines: Industry frontiers are blurring and the business model is becoming the unit of analysis of choice…

The battle between telecom providers and cable (TV) operators is heating up. Both are converging to a very similar value proposition offering basically the same products & services: telephony, broadband Internet, TV & entertainment and mobile telephony. The media and telecom analysts call this a quadruple play. In other words telcos and cablecos are aiming at offering their customers 4 services out of one hand.

What is interesting about this is not only the convergence of the two industries towards a similar value proposition, but the underlying business design based on different competencies & technologies. For telcos it was quite a natural choice to extend their legacy technology for fixed-line voice communication towards broadband Internet (i.e. ADSL). At the same time it was also reasonably straight forward to extend their value proposition of fixed line voice communication towards mobile services, though this required substantial investments in infrastructure. These so-called triple plays (voice -> mobile -> broadband) emerged quite rapidly.

Like the telcos the cablecos also started out with a legacy technology, but in cable TV networks. They rapidly realized that the access to their customers’ home, the so-called “last mile” was potentially a very lucartive asset. Soon they started to upgrade their networks to offer broadband Internet access. And with the commercial success of Internet telephony the cablecos didn’t hesitate to jump on the opportunity to offer voice communications to their customers. Their own triple was born (TV & entertainment -> broadband -> voice).

But telcos and cablecos only became face-to-face competitors when the former decided to offer entertainment over their networks and the latter aimed at offering mobile telephony: their value propositions were suddenly completely overlapping. Yet, though similar both are entirely different regarding their business model. Telcos & Cablecos rely on totally different competencies and their business models are rooted in completely different technologies. To understand their respective forces and weaknesses and their future potential we should analyze their business model. If we can identify how they are different and how they are similar we might be able to understand which business design will outcompete the other.

For me this is a nice example that illustrates how industry analysis is reaching its limitations. We need a new unit of analysis that allows us to study two similar offerings coming from different areas based on different factors and technologies…

On a less serious and less conceptual/analytical note than usual I thought I’d post a blog on how Brazil, Russia, India and China (the so-called BRICs countries) are increasingly resembling something like the business model of the world. Brazil is the resource warehouse of the world, China the factory for the globe, India the think tank and Russia the petrol pump of the global economy… A Goldman Sachs study argues that in less than 40 years the BRICs economies together could be larger than the G6 in US dollar terms.

=> I have the feeling there’s some serious business model innovation required for the incumbent economies

“Solutions come by connecting disconnected things where you suddenly have realized a connection”. This is a quote from Iqbal Quadir that perfectly applies to business model design. In this quote he refers to his idea of combining micro-credit lending to the rural poor in Bangladesh with providing (shared) mobile phone services. While many thought he was crazy to offer mobile telephony to the poor in Bangladesh’s villages, his success has proved otherwise.

Iqbal realized that if a woman could be given a micro-credit to buy a cow and sell milk then the same could be done for phone services. Born was GrameenPhone. Together with Telenor he bought a mobile license and set up a mobile phone network. Then he partnered with Grameen Bank, an established micro-credit institution. The bank offered women in villages a credit to buy mobile phones, which they used to sell phone calls to the villagers, repay their debts and make a daily living. Grameen Bank expanded its lending and GrameenPhone harvested a network of women reselling phone calls through their network.

So what’s the beauty of it all? The elements where there: micro-credit lending, mobile phone licences and the need of people to communicate. What was missing was the connector and implementor. What was needed was the one person that would be able to see how the elements could fit together in an innovative and successfull business model design. Iqbal Quadir, a great guy whom I have came across several times, has these qualities. And, oh, not to forget: GrameenPhone is based on a whole lot of entrepreneurial risk taking and tough implementation…

This weekend I came across an interesting article in the MIT Technology Review that illustrates how important it is to design the right business model at the right time – even around an old technology. The text was about Bryce Benjamin who created a startup around the technology of “statistical machine translation“. What struck me was how he drew a link between the needs of two groups of customers, the deparment of homeland security & multinationals with multilingual needs, and the product of relatively accurate machine translations.

In fact this nicely illustrates one of the main axis of business model design – the one between value propositions that match the needs of lucrative customer segments. Mr. Benjamin immediately drew the link between a relatively old technology (statistical machine translation) and a security apparatus equipped with pockets of cash that has a strong need for tools that can screen foreign language news broadcasts, chat rooms and websites. He founded Language Weaver a 35-person strong startup to improve machine translation and targeted the two big customer segments just discussed.

What I learned from this is that some people have a gift to see the link between needs emerging in the market and underexploited technologies that lie there to be picked up… With the right business model design and the right timing Bryce Benjamin might have struck a little gold mine.

A while ago I wrote about Tecnovate’s amazing business model that builds on cheap European labour which they import to India. Tecnovate achieves this buy tapping into these youngster’s dreams of discovering the world and a mystic India…

Similarly, Roland Solenthaler, a Swiss entrepreneur, built an little hotel empire by importing cheap but reliable Swiss tweens to New York to service his hostels and appartments in Manhatten. He simply tapps into the dreams of many young Swiss that crave to discover big apple in a cheap fashion. What better way to combine work and discovery? In fact, Mr. Solenthaler has so many applicants that he can choose only the best and still pays wages as low as 15 dollars with board and logding. What makes this so incredible is that the wages in Switzerland are among the highest in the world!

So what’s the business model? On the value proposition side Mr. Siegenthaler offers low-cost accommodation and food in Manhatten. But what is really innovative is how he keeps the costs down on the infrastructure side. First, Mr. Siegenthaler struck several deals with appartment owners. They give him their empty rooms for his bed-and-breakfast business and he gives them 40% of the turnover. A win-win situation. The owner maintains the house but doesn’t have to deal with renters that don’t pay. On the other hand Siegenthaler needs no capital for expansion… But the most impressive is how he builds on the dreams of young Swiss tweens. He gives them New York and a little pocket money and receives their labour in exchange.

What do we learn from this: Like in Tecnovate’s business model this is really offshoring upside-down. It shows that the biggest cost saving potential for low-cost business models can lie in the most unbelievable places. What better way is there to get cheap reliable workers than by fulfilling their dreams?