Saturday, 31 December 2016
A year back, media mostly classified Facebook and other internet firms like Google as tech companies. And recently ‘is Facebook a tech or media business?’
Let’s take a look.
Is AirBnB in the hotel sector? It owns no physical assets. Its only asset is information and it profits from it. It does this by getting a cut every time its platform provides the information for a consumer to select then book accommodation from a home owner. Perhaps AirBnB is really an information business, in hospitality?
Is Google a tech company? (Its search business is considered here.) Sure, it is staffed mostly by engineers but like AirBnB, owns little physical assets. It does however have a lot of data centres but that’s like telcos. Telcos depend on data centres but they are not considered core assets, connectivity is. Google’s core asset is data. Searching turns it into information. It’s monetised through the act of searching, with ad sales.
An aside, PageRank, the algorithm (it is now only one mechanism alongside data analytics, machine learning and other algorithms) that made Google by significantly improving search results uses a peer-to-peer model. In PageRank, the more a website is linked by other websites, the higher it’s ranked in search results. Website-to-website is peer-to-peer (p2p). Similarly, AirBnB (sharing economy), Alibaba (markerplaces) and SnapChat (IM) use the p2p model in their business model.
What about internet messaging (IM)? WeChat, WhatsApp and Line are little more than platforms that allow us to communicate with one another, while allowing them to gather information on our chats. Of course ads are also placed because we spend so much time on these platforms. Ad sales are normally associated with businesses that deal with information. Perhaps IM firms are information businesses, in communications.
Isn’t text messaging and voice the traditional business of telcos/celcos? This makes a classic case study of an industry transformed by the internet. Telcos today are essentially broadband providers. Their traditional business is being taken over by IM players (Dichotomy of a modern telco).
EBay and Alibaba? (Their original marketplace business is considered here.) They are primarily marketplaces, holding no stocks, not unlike AirBnB, connecting sellers to buyers. Buyers make purchasing decisions based on the information provided by sellers. Isn’t this a new model of trading, based on information?
And so to Facebook. We create data when we posts on our timeline and like Google, it’s mostly staffed by engineers, running off data centres, on a digital platform. The revenue model is similar – ad sales via the information mined from the data and placements from our copious face-time on the platform. Perhaps this is why media is confused. On the one hand, like media firms, Facebook is an ad-based business. On the other, it appears tech-like. And both target consumers.
Let’s dwell deeper.
Media (news) Facebook
Core biz news, content data/information
Revenue ads, sales (content) ads, revenue sharing (content not sold)
Method provide news/content provide a service through a platform
News write news articles through third parties, not internally written
Content news social in nature
Mechanism internal (reporters) external (crowdsourced, 3rd party)
Staff (core) editorial tech
Biz model content social, data
Is Facebook a media firm? They don’t provide news or content except indirectly and even these are miniscule compared to user-generated content. Furthermore such content (latter), social in nature, are certainly not what traditional media produces. New media, if that’s an appropriate term may apply to internet-inspired startups like Reddit, Buzzfeed or Quartz. Reddit in particular could proof to be one model of the future of news media.
Is Facebook a tech firm? They don’t provide technical services but consumer services that have nothing to do with tech. Tech is only used internally and as an enabler. Among the internet plays, Github, used by the software development community is unquestionably a tech firm as is Red Hat.
Facebook’s core business revolves around social content, not news per se, and is crowdsourced unlike media firms that write content in-house. And while Facebook is heavily tech-dependent, that doesn’t mean it is a tech firm. Using is not the same as providing. Perhaps Facebook is really an information business (in the sub-category of social media).
This also applies to Pinterest, Uber, Craiglist, Change.com, Foursquare, Twitter, Snapchat, Telegram, Instagram, Uber, Alibaba, Lending Club, LinkedIn, Quora, Yelp, Tinder, Glassdoor, upWork, Evernote,.....
“..and Google is expanding into everything to do with information’ – Economist, 17 sept 2016
In time, perhaps 10 years, Fortune 500 (Fortune magazine’s annual list of the largest companies in the US and the world) would add an ‘information’ category. So will the stock exchanges globally. Media firms of today will be reclassified into this category as will social media and internet businesses that rely on information. Even further out, this information category itself may break out back to its sub-categories; news/content, social media, search, marketplaces, communications as each sector enlarge. Tech is the enabler of all these information age firms.
Since we’re on the subject of Facebook, the post next week will show an angle on how it works that may shed light on how value is produced in a digital economy.
Sunday, 25 December 2016
Amazon’s operating culture offers a lesson for sectors trying to transform in a digitising economy. This post compares Amazon to the US’ retail industry as an example.
New versus traditional culture
Amazon is really a traditional retailer (in contrast, eBay using a marketplace model isn’t) with a difference – heavy reliance on tech. Today storied retailers like Sears have followed this model by investing equally in tech. But while Amazon continues to grow, Sears isn’t.
Jeff Bezos’ inspiration came in 1997 when he realised that the internet will transform industries and started Amazon.com. “Bezos still talks about the Internet as an uncharted world, imperfectly understood and yielding new surprises all the time.” (‘Jeff Bezos's Top 10 Leadership Lessons’, Forbes, 4 April 2012). He lives and breathes the internet in his daily work. How is this translated to business?
Customer-centricity is the first law
Ask any large business if customer service is important and it will be yes. But is it at the top of their list or near the bottom? In Amazon’s case, it drives the business. An example - Amazon has an annual multi-million budget just to improve the response time of its website. A manager said in an interview with Bloomberg that if she can shave 0.1 second off, revenue would increase by tens of million. Now if the IT manager of a large local retailer asks the CEO for half a million to improve their website response by say, one second, what do you think will be the response? No! This is the gulf between old culture and new in the treatment of customers. In the same article, Jeff Bezos said “In the old world, you devoted 30% of your time to building a great service and 70% of your time to shouting about it. In the new world, that inverts” and further, Amazon “obsesses over customers”.
Aping does not solve the fundamental problem
‘Culture eats strategy for business.’ - Peter Drucker
Banks today fear the impact of fintech. But their strategy seems to be to work with fintech and copy their processes with hackletons and open workspaces. This is exactly what many large traditional retailers are doing in their response to Amazon, aping in the heavy use of tech. Such an approach only touches the surface. Banks and other organisations concerned with transformation really should execute like Jeff Bezos and inculcate a different operating culture. If they wait and see what rivals introduce, then try to match and one-up it, they will always be followers, not innovators in a period of change. Like Borders (a bankrupt book seller, competing with Amazon), it may be too late when they finally realise they are doing it wrong.
To take the lead, to innovate, it’ll help if businesses are able to grasps the operating culture of the digital economy (New Culture).
What is New Culture?
Today’s organisation culture can be described as top-down command-control driven and inward-looking, the latter due to the environment. Ronald Coase’s famous theory of firms explains why. Organisations are defined by internalising ie. work are mostly carried out internally because the process of trusting external resources is expensive. It is far cheaper to do things within the organisation even if there are better resources without. The result is fatter organisations with a more complex form, a structure required to carry out work more efficiently.
But with the internet, the environment has changed. External resources can be tapped as trust can now be engendered at a far lower cost. The example of Alibaba is compelling.
’What has provided a lifeline to Alibaba is the user-generated rating systems for the thousands of online small merchants that Alibaba would otherwise have no way to police.’User-generated review is a form of crowdsourcing. (Crowdsourcing is a technique employed to engage the public with intent but in an informal manner to participate in an activity.) If Alibaba did not use crowdsourcing, it would have to build a huge internal team to traverse China to rate the merchants (which is how most firms today accomplish similar task). This would have costs hundreds of millions of dollars and probably be less effective.
- China Daily Asia Weekly, 12.08.16
- China Daily Asia Weekly, 12.08.16
Another example is AirBnB. When selecting accommodation, we shortlist it if the ratings and customer reviews are good. Previously hotels use branding, costly, to achieve this. Today we still trust brands but we trust user reviews more.
The result (from crowdsourcing) is that organisations are leaner, cheaper to run and with less bureaucracy, the organisation structure flattens. This is evident when one compares large internet firms (Google, Facebook, Amazon) to the large industrial conglomerates (GE, Boeing, Sears). The former produces similar large revenue with less workforce and expense.
The world's largest hotel chain founded in 1974 has 8000 hotels & 32,000 employees.
New culture as demonstrated now embraces externalisation of work. Crowdsourcing is one aspect and as shown is now a business tool, that if used correctly saves the firm costs.
Besides customer-centricity, new culture is also data-driven. Firms have always used data but in the digital economy, the role of data has been elevated. What Google sees, telcos do too but little is done to monetise it while Google built a billion-dollar search business out of data. There are other similar examples where tech startups take advantage of data that traditional firms miss. The latter thus becomes mere followers while being early-movers would have advantaged them in a competitive industry.
“Since Alibaba’s logistics offshoot Cainiao launched its big data-backed smart solutions for fast delivery of orders in 2015, the nation’s major logistics companies have followed the trends to improve efficiency” – China Daily Asia Weekly, 18 Nov 2016.
To be able to see the insights that Google or Alibaba saw, traditional firms need a different mindset. Executives need to embrace the new culture which is really internet culture.
Culture is a huge topic. I will conclude by summarising key characteristics.
Today’s organisation culture New culture (exemplified by tech startups)
Highly structured, many layers Flatter organisations, less structure
Top-down command-control More democratic and bottoms-up
Bureaucracy More trusting, open, less rules
Internalisation Adds externalisation
Limited collaboration Highly collaborative
(partners through contracts) (adds the public and non-traditional partners)
Tend to withhold eg. information Willingness to share
Contract work Volunteerism
Everything is paid for or charged An element of free
Internal (staff)-centric Customer-centric
Data is incidental Data-driven, data has value
Inward looking Open
From the list, one can conclude that the foundation of the digital economy is openness compared to the closed (less open) traditional organisation culture.
©Thet Ngian Chen, internetbusinessmodelasia.blogspot.com (2012, 2013, 2014, 2015, 2016). Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Thet Ngian Chen and internetbusinessmodelasia.blogspot.com with appropriate and specific direction to the original content.