5 ways developers can extend your business model

Developer programs and third party software developers used to be important only for companies making computer operating systems like Microsoft, IBM or Apple.

Blog004_Final_web

Many people still remember how Steve Ballmer, CEO of Microsoft, rallied his troops chanting the word “developers” 16 times.

Ballmer was right – Microsoft won the battle for dominance of personal computing by winning developers. 20 years later, however, Microsoft lost the battle for dominance of mobile to Google and Apple; by losing the support of developers.

Today access to developers has become a competitive advantage in almost every industry, from games and media to banking and agriculture. Forward-looking companies invest millions of dollars, and their best minds, to create APIs and developer programs. No matter how a company runs its business, developers can extend the company’s business model in five major ways. How? Let me explain.

1

A successful developer program can boost all 3 aspects of a company’s business model: value creation, value delivery and value capture.

1. Developers as customers

The most obvious way of thinking about how 3rd party developers can make you money is to see developers as paying customers, i.e. capture value by selling to developers. For example, Amazon Web Services, Microsoft Azure, Google Compute Engine or Salesforce App Cloud.

There are also many companies for which selling services and tools to developers is the only business. For example Twilio, a startup company that has created an API on top of standard telecom services, has built a $100million-a-year recurring business (2014 figures) by providing tools for developers to integrate SMS and telephony into their apps.

2. Developers as product extenders

Developers can also boost your business by adding new features you never designed or even thought of – thus making your product more valuable to your paying customers.

The most obvious example is the Apple iPhone. Apple’s developer program led to the creation of over one million apps for the Apple App Store. These apps are 1+ million features that make the iPhone more valuable for the users. Often the value is added through new functionality provided by the app, but sometimes it’s just about constant supply of cool new things. Essentially the iPhone is not a phone, but a computing platform allowing 3rd party developers to extend it beyond anyone’s imagination.

There is an ever-growing list of companies which work with developers to extend their products making them more useful: From SmartThings (recently acquired by Samsung) in smart home, to Automatic and Ford in connected cars, and DJI in drones.

[tweetable]Developers can extend products through informal partnerships[/tweetable]; consider how someone using IFTTT can get a Nest thermostat to talk to a Philips light bulb or Amazon’s Echo smart home hub. All without the need for closed-room partnerships, consortia meeting in exotic locations, or even NDAs.

3. Developers as data harvesters

Google and Facebook, both data-driven advertising companies, turn to developers to make their their ads more effective for advertisers. Android, Google’s mobile operating system, helps the company to harvest data about mobile users. Developers make Android more valuable to users through 1.6 million apps available on the platform. More Android users means more data for Google making Google ads on the desktop more effective, and therefore more valuable for advertisers.

Facebook works with developers to integrate their identity services into as many apps as possible. The reason is simple: the more apps use Facebook’s login system to identify the user, the more Facebook will know about their users. Similar to Google; developers help Facebook to harvest user data to make their ads more effective and make more money.

4. Developers as distributors

[tweetable]Developers can help deliver your product to new markets and new users by being a distribution channel[/tweetable] for your business.

For example, Uber works with developers to integrate the company’s on-demand transportation services into new apps and services. The company works with large partners (United Airlines, Hyatt), successful Internet companies (OpenTable, TripAdvisor) as well as young startups (Momento, Tempo) to make Uber’s “take me from A to B” services accessible in wide array of use cases.

Developers also help Uber to sign up new users. The company’s affiliate program rewards developers for each valid first trip in the U.S. by a new user whose trip request originated through their app.

5. Developers as resellers

[tweetable]Developers can also help resell your product by being a sales channel[/tweetable] for your business.

Amazon works with developers to boost sales of physical and digital products. Amazon Mobile Associates program allows developers to earn up to 6% as revenue share on purchases made through their apps and games. Amazon Replenishment Service enables connected devices to order physical goods from Amazon when supplies are running low.

Seeing developers as a sales channel is not limited to the realm of Internet companies. Wallgreens, the largest drug retailing chain in the United States, also works with developers to boost sales of its digital print services. The Walgreens Photo Prints API allows users of mobile apps to print photos to any of the 8,000+ Walgreens locations in the US. The mobile app developers earn a revenue-share commission with every photo order that’s placed through their app.

Building a developer program and an ecosystem quickly becomes the norm and the baseline for competition in almost any industry. In fact, checking whether a company has a developer portal (typically at developer.company.com) is a leading indicator of how well the company is prepared for the future.

— Michael

To understand Internet of Things you need to understand Zenefits

Internet of Things is a buzzword in many board rooms in 2015. Enterprises from logistics to construction to healthcare, are seeing IoT as the source of data-driven cost savings and competitive advantage. For example allowing building operators to drastically save maintenance costs or allowing farms to have real-time insights that can systematically increase the yield of their crops. But there is a much bigger business model shift taking place. One that will cause traditional industry boundaries to collide and some to even collapse.

ch4

To understand how IoT will change the business world, you need to understand Zenefits.

Zenefits is one of those unicorns media loves to talk about and VCs would crave to fund. Since launching in May 2013, Zenefits reached $20 million run-rate by the end of 2014, and is projected to reach $100M run-rate by end 2015. And it just raised a whopping $500 million series C at a $4.5 billion valuation. Andreessen Horowitz, the famed venture capital firm now lists Zenefits as its largest investment to date.

Zenefits is an insurance broker disguised as free online HR software. The California company offers SaaS HR services to over 10,000 small and medium-sized businesses to help them manage all their HR processes in one place. Best of all it’s free. Zenefits earns commissions on health, dental, vision, life, disability, or any other insurance, every time their SMB customers open up a new health plan or onboard a new employee through its SaaS solution (In the US, every company has to offer their employees minimum health care).

zenefits-dashboard-screenshot

Zenefits adds value in helping small companies manage the complexities of HR. It captures value as an insurance broker.

In essence, Zenefits is an insurance company that offers free SaaS services to acquire customers. SaaS requires low-cost low-touch sales and so Zenefits profits on the delta between the customer acquisition cost (CACs) in the HR and SaaS industries. Of course, Zenefits creates a captive audience which it then can resell into more insurance services and higher profits.

Our ‘low-touch’ online model exceeded our expectations, affirming the continued health of our core business [source]

Wired magazine calls Zenefits’ business model “crafty and unusual”; crafty in using indirect models to profit, but as we’ll soon see Zenefits’ cross-industry business model is not unusual, but relatively unknown.

In fact cross-industry subsidies are business as usual for mobile industry disruptors including Google (providing the Android OS for free), Amazon (providing e-readers at cost), Xiaomi (providing mobile phones at cost) and WeChat (providing communications apps and storage services for free). At VisionMobile we’ve been studying how these companies have disrupted the mobile industry through Asymmetric Business Models (see our earlier report on the topic) a business model that crosses industries, by forcing profits to migrate from one industry to another. And we argued in that paper:

In the digital era, companies can get an unfair competitive advantage by breaking industry boundaries.

The next diagram shows how Google, Facebook, Amazon and Xiaomi have been transferring profits across industry boundaries, and thereby enjoying an unfair advantage.

asymetric-business-models-transfer-profits-across-industries

Apple has an unfair advantage over Nokia by offering a library of over 1 million apps and 40 million songs, while capturing value in premium connected devices. Google has an unfair advantage over Yahoo and Microsoft in Search when capturing value in online advertising by creating value in the free Android that allows smartphone, tablet and IoT makers to compete. Amazon has an unfair advantage over eBay and Wallmart, by offering Kindle tablets at cost while capturing value from that captive audience in e-commerce sales. Xiaomi as unfair advantage over Samsung by offering rock-bottom priced devices and wearables to its fan base, while capturing value in e-commerce services. WeChat has an unfair advantage over telecom operators by offering free messaging and voice calling while capturing value in e-Commerce, brokering anything from branded emoticons to car sales.

Last but not least Facebook. [tweetable]What Facebook lacks in vision it makes up in execution[/tweetable]. Its Facebook Messenger, now at 700 million users, has been copying the asymmetric business model of WeChat by allowing games to be bought and played within Messenger. David Marcus, head of Messaging products at Facebook sees voice calling within Messenger as a platform for much bigger things:

VoIP is just one way that the company hopes to use the messaging app as a platform for much bigger things, including online payments.

IoT is taking industry collision to the next level

What Zenefits, Google and weChat have pioneered, IoT is taking to the next level. Internet of Things is adding connectivity and computing to thousands of everyday products. Today, most of these objects are following a “one device, one app” paradigm – by slapping an app to a thermostat, car or building management system.

Over time, we believe a new paradigm of “one device, apps everywhere” will prevail. In this paradigm, data is not a function of the device, but a product.

Think of a fitness band that uploads data into a health service, and allows you to run low-cost, daily health check-ups. Think of a door lock whose data is used to make intelligent decisions about the temperature you set your home to. Think of a smart home security system whose data is used to make decisions on home insurance premiums.

Now that we have an understanding on how Zenefits, Xiaomi, Amazon and weChat use asymmetric business models, we can see that IoT will effectively unlock data from connected things in any industry and monetise that data in another industry. Fitness band makers will capture value in health services. Door lock makers will capture value in the energy market. Car makers will capture value in employee productivity management. Telecom operators will capture value in selling insurance.

Effectively, IoT allows hardware vendors to divorce the business model of the device from that of the data that are generated by that device. Once divorced, the business model can “invade” complementary industries.

Naturally, companies who use asymmetric business models will wield an impossible-to-beat advantage to their competitors who are caught unawares by new players that do not plan to make profits in their industry. And as we argued earlier in our post on Commerce of Things, an unconnected object will be a missed business opportunity. At the same time, connected objects can threaten your business with unfair competition from other industries.

Xiaomi is leading this new era of asymmetric business model era by example – far beyond the cost disruption that mainstream press think it is – and is just about to disrupt the home security industry. Xiaomi just launched their first home security solution for 199 RMB, a set of beautifully designed white-coloured products that, can be easily mistaken for Apple China products selling at 199 USD and not 199 RMB. Yes, at a price of about 30 USD for a full set of home security products, that connect and complement nicely other Xiaomi devices from mobile phones to air purifiers, it is obvious that Xiaomi is not looking at making profit on these devices themselves, but on leveraging data collected from their customers (the “Mi fans”) to provide even more valuable services to them over time. If we assume that Xiaomi is selling these products at cost like they do with their mobile devices, they are in effect securing a first entry in the valuable “home IoT” segment at zero cost of customer acquisition. Traditional home security companies better brace for impact.

xiomi-home-sensors

For those companies in IoT, and even those bringing the IoT and ABM buzzwords in their boardrooms, here’s the recipe for your next executive strategy meeting:

Find any industry with a lower customer acquisition cost than yours (e.g. SaaS). Develop or acquire a product in that industry that is a complement to your core business and wrap it around your business.

And just like in the mobile industry, [tweetable]most IoT devices will eventually be offered at cost, if not below cost[/tweetable], so beware of newcomers to your industry bearing gifts.

Be prepared to challenge the age-old definitions of industries and markets. The world is becoming an unusual meal of business model spaghetti.

Andreas and Nicolas

P.S. For readers in Europe, it can be worrying that US and Asia seems so far ahead in using asymmetric business models, from Amazon and Google to Xiaomi and weChat. If Europe wants to stay competitive, including in the digital era, it needs to use such competitive business models, too.

–Andreas Constantinou
As CEO and Founder, Andreas oversees the growth and strategy of VisionMobile. He has twelve years experience in mobile, having worked with the top brand names in the mobile industry including Telefonica, AT&T, Telenor, Vodafone, Deutsche Telekom, MTS, Nokia, Sony, RIM, HTC, Qualcomm, Ericsson and Microsoft. Over the last five years, Andreas has grown VisionMobile into the leading, most respected research firm on app economy and developer economics, with a client base and reputation that out rivals companies many times the size.
Andreas on LinkedIn

–Nicolas Sauvage
Nicolas Sauvage is a “Software guy”, since first programming at 8 years old, and forever passionate about Software contributing to a better Connected World. He joined the management team of NXP Software in Feb 2011, and took various responsibilities over time including leading the OEM Business Line, worldwide sales, product management, Head of Korea, Head of Greater China. He is an Alumni of TTPCom, OpenPlug, London Business School and INSEAD.
Nicolas Sauvage on LinkedIn

To understand Beats you need to understand Lady Gaga

The news are finally out — Apple is buying Beats for 3 Billion Dollars.

shutterstock_93393982

Headphone sales? Music streaming service? Wearables? Music label deals? None of the current Beats products look as a credible reason for a deal of that size. Something much bigger is going on. It is not about what Beats is today, but about what Beats can become in the future.

To understand what Beats can become we need to understand Lady Gaga first. Lady-Gaga-the-business-model.

Lady Gaga broke in with her August 2008 debut album, “The Fame”, and became an international megastar in a few short years. Gaga won Billboard magazine’s Artists of the Year title 2010, is ranked fourth in VH1’s list of 100 Greatest Women in Music, is the fourth best selling digital singles artist in US according to RIAA, is on Forbes magazine The World’s 100 Most Powerful Women list from 2010 to 2013, and was named one of the most influential people in the world by Time magazine.

Lady Gaga was the subject of numerous business case studies, including one by Harvard Business Review (Anita Elberse, Michael Christensen) and Business Strategy Review (Jamie Anderson, Jörg Reckhenrich and Martin Kupp). What makes Lady Gaga special is her pioneering use of social media to build a loyal community of fans to “sell the artist” in what the music industry calls a “360 deal”. The “360 deal” is reminiscent of a VC investment model, where a label invests more money up front in exchange for a piece of merchandise sales, touring revenue and other earnings that artists had long kept for themselves.

The HBR Lady Gaga (B) case study notes that as early as 2009 and 2010 Lady Gaga already had multiple consumer brand partnerships, including:

  • Beats by Dr. Dre selling branded Heart Beats model of the $100 in-ear headphones as “undeniably unique” and likely to “attract fashionistas far and wide.” (The story is much bigger here than this specific deal.)
  • Virgin Mobile sponsoring the U.S. tour dates of the Monster Ball tour.
  • Polaroid, which appointed Lady Gaga as creative director for a special line of products that would be released in the coming years.
  • MAC Cosmetics for which Lady Gaga joined 1980s pop legend Cyndi Lauper as the latest celebrities to feature in MAC Cosmetics’ Viva Glam advertising campaign.

In 2011, Amazon launched a promotional campaign selling at a loss Lady Gaga’s album “Born This Way”, essentially subsidizing distribution of the new album.

In an interview with The Wall Street Journal, Gaga was asked whether she believed that “Born This Way” was worth more than 99 cents. The answer is very telling:

“No. I absolutely do not, especially for MP3s and digital music. It’s invisible. It’s in space. If anything, I applaud a company like Amazon for equating the value of digital versus the physical copy, and giving the opportunity to everyone to buy music,” she said. “It also wasn’t really 99 cents, because Amazon paid the difference on all of those purchases as part of their promotional campaign for one of their new services. I think it’s amazing and it was a really nice surprise and I felt honored that they chose my record to be part of it.”

Troy Carter, who discovered Gaga and was her manager till November 2013 being widely credited for much of her business strategy sums it up nicely in his interview to FastCompany:

It was more about building a platform on top of music—because music, we realized, sells everything but music.

Gaga-the-business-model is a poster child of the new economics of digital era. Mike Masnik of TechDirt calls it the economics of abundance brilliantly explaining it in just minute and a half video here: http://www.techdirt.com/articles/20091020/1519476609.shtml.

(Note that Mike accurately predicted the rise of the new business models in music well before Gaga’s business success became known.)

Digital music is abundant (“It’s invisible. It’s in space” as Gaga puts it) and music industry whose business models were rooted in scarcity of vinyl records and later CDs were turned upside down by the need to deal with abundance of digital music. The good news, Mike says, is that for every abundance new scarcity is created. Gaga-the-business-model is an excellent example of how to benefit from these new scarcities created by the transition to digital.

The business people behind Gaga also saw the missing link in the digital music value chain. This missing link is also a huge opportunity to fill the void going much further that “selling the artist” to the loyal fan base.

In February 2013 Jimmy Iovine, Chairman of Interscope Records (Lady Gaga’s record company) and at the same time co-founder and CEO of Beats, gave very revealing interview to D:Dive Into Media. The most interesting bit comes in the Q&A section where Jimmy divulges his vision for BeatsMusic.com 35 min 15 sec in the interview (and it’s not about curation):

“But there something else going on our service that doesn’t go on anywhere. We have to make it user-friendly to the artist. They have to be able to build businesses on it. They have to be able to have the information who is using their music, where they are… That has to become a business for the artist as much as communicating with their fans. Right now, they (music services) have all the information and the artist have no information. No one knows… I don’t know. I own a record company. I would die to know who bought my records on iTunes or bought my tickets on TicketMaster.”

Jimmy Iovine sees the opportunity in changing the game and “building a communication between a fan and an artist.” In other words Beats Music is not yet another streaming service designed to sell music, but a platform for artists to build businesses and “sell everything but music” as Troy Carter says.

That brings us all the way from Gaga to Uber, where Troy is an investor. Steve Schlafman from RRE ventures says in “Uberification of the US Service Economy”:

“On-Demand Mobile Services (like Uber) deliver a “closed loop” experience by collapsing the value chain including discovery, order, payment, fulfillment (offline but within owned network) and confirmation.”

In essence, Beats aims to become Uber of music by aggregating demand, connecting listeners to artists and empowering the artists to build thriving business on top of the platform. Much like Uber, which promises to end the era of poorly paid cab drivers. Or like Apple App Store, which connects users with app developers allowing them to build business on top of the platform.

Pandora, Spotify, Play Music and Amazon that are all designed to sell music, will have very hard time to compete against a platform for building businesses on top of music. As Marshall Van Alstyne said in slightly underestimated way (pun intended):

“There is a strong argument that platforms beat products every time.”

The acquisition makes very good sense for both Apple and Beats. Beats gets the opportunity to kickstart network effects of the platform by bringing huge base of Apple users together with their credit cards to artists. Apple at the same time will benefit by bundling the music platform with its idevices, where the company makes most of its profits and badly needs to rejuvenate growth.

(I don’t think Apple will prevent BeatsMusic service from being available on Android devices. Having best experience with most fresh music reserved for Apple users will do just fine. “Apple-first” strategy works very well for both most mobile app developers and Apple.)

Interesting times ahead — As Troy Carter says in his interview to Guardian:

“Hollywood, record labels and tech giants such as Apple, Google and Samsung face immense risks and opportunities. Everybody should be afraid right now. We saw what happened to Nokia and BlackBerry and Motorola. Nobody saw Android coming. Nobody saw the iPhone coming. Nobody saw Samsung coming. No one is safe right now. Everything is moving so quickly.”

The music industry needs to brace for a deep and painful disruption, much like legacy taxi cartels and unions across the globe. Samsung needs to find a new source of differentiation after acknowledging defeat with its home-grown music service. Will health and wearables fill this void? Google will probably scramble to build a competitor to Apple/Beats refocusing YouTube Music from labels to artists. Amazon will need to find a solution if the company wants to stay relevant in the music distribution on which it relies for promotion.

Of course we haven’t heard much of it from Apple or Beats, but Jimmy Iovine said to Re/Code following the announcement of the acquisition:

“Obviously, we can’t talk about that, as you know. See, in the record business, you can show someone your song, and they don’t copy it. In the tech business, you show somebody your idea, and they steal it.”

The strategy lesson from Apple and Beats is this: Look for opportunities to build platforms connecting consumers with value-adding complementors. (Think a “connect-ing business”, and not a “connected business”.) Capture value through bundling with the platform that will buy you hyper-growth driven by network effects and insurmountable competitive advantage. (And of course don’t tell anybody what’s you are up to before it’s ready.)

Intrapreneurial: Five ingredients of the corporate innovation recipe

The survival of large enterprises calls for innovation. It requires continually creating a new set of businesses to sustain growth and profit. Guest author Avner Mor identifies five crucial ingredients that senior management should use to succeed in their innovation program recipe.

shutterstock_163409894

Innovation exists in the form of ideas, innovation leaders and teams. Everyone talks innovation. Yet we see more and more opportunities missed by large enterprises to leverage their enormous assets – technologies, brands, relationships and routes-to-market – within their internal innovation programs. Innovation programs are constantly being established and funded, but months pass and success is often not materialized. I have seen quite a few testaments to this through my years at several global corporates and startups. Continue reading Intrapreneurial: Five ingredients of the corporate innovation recipe

Microsoft + Nokia: the marriage of two broken business models

Microsoft’s acquisition of Nokia’s Devices division is the new beginning for both Microsoft and Nokia. But how does it make sense when both Nokia’s legacy OEM and Microsoft’s mobile software licensing business models are broken? VisionMobile Strategy Director Michael Vakulenko takes a long-term perspective of the acquisition through a business model lens.

Nokia and Microsoft

Most of the analysis on the Microsoft acquisition of Nokia comments on the reasons for the acquisition, whether it’s a good or a bad strategy or attempts to predict how Microsoft products will evolve. The key question however is what is the likely future for the new Microsoft? Continue reading Microsoft + Nokia: the marriage of two broken business models

Connecting the next 5 billion users: Emerging markets and the need for new business models

[With so much excitement about smartphone growth, we often forget that the biggest opportunity still lies ahead, in connecting the next 5 billion smartphone users to Internet and apps. Guest author Tom Christian Gotschalksen talks about the idiosyncrasies of emerging markets, and the business model innovations that are needed to close the smartphone gap]

Business model innovations for connecting the next 5B users

Smartphone growth has taken the wireless market by storm, having exceeded the one billion mark back in October. The US and western European markets for smartphones are about to saturate, and with those also the related industries of apps, content and mobile Internet connectivity.

Now US carriers are looking for growth outside of US, and Internet heavyweights like Twitter, Google and Facebook are targeting emerging markets where the remaining five billion users are still to connect to apps and the Internet.

In Asia, Africa and Latin America there is a wave of new, aspiring digital natives. They are enabled by $50 smartphones, and the burgeoning second hand smartphone markets, creating a huge demand for Internet services, apps, games, and Internet connectivity.

But there are two important challenges in connecting the next 5 billion smartphone users to the Internet and apps. It’s the business models behind data and handset subsidies, which are in dire need of innovation. Continue reading Connecting the next 5 billion users: Emerging markets and the need for new business models

Asymmetric business models and the true value of innovation

A few weeks ago, in association with Ericsson, we published the Telco Innovation Toolbox discussion paper. It introduces ten economics and strategy frameworks that will help operators to accelerate their “digital” strategies, make the right innovation investments and avoid costly mistakes. Previous four chapters of the paper were published on our blog. Today we are publishing “Asymmetric business models” and “The true value of innovation and the cost of doing nothing” chapters.

For previous chapters from the report, go here. You can download the full PDF report [vm_form_download link_text=’here’ product_id=’3751′]. Continue reading Asymmetric business models and the true value of innovation