Home Global-ICTGlobal-ICT 2003 More Than Two Sides To The Story†& Multi-Sided Market Platforms And The Communications Industry

More Than Two Sides To The Story†& Multi-Sided Market Platforms And The Communications Industry

by david.nunes
Michael J. ReuschelIssue:Global-ICT 2003
Article no.:24
Topic:More Than Two Sides To The Story†& Multi-Sided Market Platforms And The Communications Industry
Author:Michael J. Reuschel
Organisation:Unisys Global Communications and Media Industries
PDF size:116KB

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Article abstract

Telecommunications has done more for markets than simply connect buyer and seller. Telecommunications based multi-sided platforms make possible multi-sided markets where many consumer groups can transact business. To be successful, multi-sided markets simultaneously motivate distinct groups of customers. Those that provide these platforms facilitate the efficient integration of content, customer and channel. The role of the platform is to get and keep everyone on board. In these markets, traditional rules for pricing, choosing partners and for business models become obsolete.

Full Article

DoCoMo and the Mainichi Shimbun newspaper. Vodaphone and the FTSE. The Mall of America and American Express, Unisys and the Palm Operating Systems. Aside from what may be the obvious, all represent examples of businesses that operate a platform by bringing distinct groups of customers together. In each case, the platform provides a†wa? for multiple groups of consumers to convene and for business to be transacted. Here’s how they do it. Through its I-mode services, DoCoMo, allows content to meet customer efficiently and cost effectively over its wireless channel. The Mainichi Shimbun – Japan’s largest daily newspaper, unites readers and advertisers. The Mall of America – the world’s largest shopping mall complex, is not just a place where the American Express card is used – it makes it possible for retailers and customers to converge. And what about American Express? Well, it makes it possible for those customers and merchants in the Malls of America to make beautiful music together at the check out counters – acting as a crucial link between customer and retailer. In the case of Palm operating system, they, like many operating systems, have created a platform attractive to hardware manufacturers, applications developers and end users all at the same time. Finally, in the case of Unisys, our messaging platform enables service providers, hardware manufacturers, applications services providers and content providers to serve the customer with enhanced messaging services and features. So what’s the relevance to the communications industry? As communications service providers, and even traditional systems integrators such as Unisys and IBM, look to facilitate the efficient integration of content, customer and channel, coordinating the activities of these distinct customer groups is complicated – to say the least. If the role of the platform is to get and keep everyone on board, the more traditional rules of pricing, the choice of business partners and even the business model used to guide the business itself becomes obsolete. The ability of the platform to motivate distinct groups of customers simultaneously, becomes critical to the success of all involved – and to the market overall. There is clearly more science than art to being successful when there are more than two sides to the transaction. Recent observations about the success and failure of business over the last 3-5 years – coincident to the emergence of the so called “new economy businesses” and the communications attempt at convergence – underscore this point. Who Isn’t A Multi-Sided Platform? It is a common temptation to think that all businesses are multi-sided – or at least two sided platforms in one sense or the other. Not true. Here is a list of criteria that sets multi sided markets apart from the “single-sided” businesses that have characterized the business landscape for decades. * Two or more groups of customers must be served – readers and advertisers, shoppers and merchants, content, communications service providers and systems integrators. * It is imperative that there be an obvious benefit to these distinct customer groups from having an intermediary. What is true of most platform industries is that members of each customer group benefits when more members of the other complementary customer group are on the same platform. For example, advertisers want more readers, merchants want more customers, and end users want more applications and better technology. * Bringing all of these parties to the transaction together requires that there be a clear and compelling value proposition for each. Content providers utilizing the I-mode platform would certainly find customers on their own through their own marketing and technology channels. However the fact that I-mode assumes the billing responsibilities makes for a more efficient and cost effective delivery of content for everyone. The Devil In The (Pricing) Details. When all is said and done, however, pricing is what determines a multi-sided success. Unfortunately, setting prices when there are multiple customer groups that interact with the platform at the same time requires a lot more than a simple “cost-plus” formula. Take the credit card industry. Cardholders don’t pay to use a credit card—in fact many even get airline miles or reward points each time they swipe. Some cardholders may pay a modest annual fee, but that is more than offset by the float inherent in having to pay a bill only once a month. And the cost of all of this is offset by the merchants who pay the card companies a fee for making it easy for customers to pay with credit. So, how does a multi-sided platform set prices? To paraphrase a famous American comedian very carefully, an effective strategy is often for one side to subsidize the other so that all sides “get on board.” Sometimes that is done by having one side make significant investments so that the other side is charged low prices or nothing at all. Take the media industry, for example. Readers of newspapers or magazines are charged relatively little (sometimes nothing at all) for access to news, information and other content. Advertisers subsidize the costs that the Mainichi Shimbum incurs in producing a daily paper that keeps subscribers coming back every day. In the case of I-mode, they provide billing services and a channel that facilitates the delivery of content – games, information and rich media – to customers for a small fee to its content partners. Shopping malls charge rent to the retailers who choose to do business there, a fee to event organizers who wish to stage promotions there while shoppers are allowed free access. Inherently tricky in all of this is an understanding of the dynamics of the “multi-sides” such that the interdependencies between the demand and marginal costs can be captured and modeled. The traditional business school concept of price points therefore becomes less relevant. It is the pricing structure that drives the ultimate pricing scheme. Moving a price from $100 to $99 to stimulate demand is less important than establishing who pays, why and how much. And here’s where you can set aside yet another business axiom – he who causes the cost should pay the freight. By its very nature, multi-sided markets exist because many groups of customers use the product or service at the same time. That means that each side causes costs as well as creates benefits. The implication is that the business models of a multi-sided market platform must be redesigned to reflect the flow of costs and revenue vis a vis the incentives each party to the platform must satisfy. The Bottom Line So, let’s say that you are a service provider looking for a content partner to create a more compelling service for your customers. Where do you begin? What we know for certain is that platform markets don’t behave the way most single-sided markets do. And, fortunately, we can learn a lot from those who have succeeded and failed in other industries, as well as our own. Starting small is better than “building it in the hopes that they will come.” Being second or third is often better than being first, and low pricing just to build share often backfires. The work of coordinating the activities of content, service providers, hardware companies and applications developers gives great insight into the mechanics of a multi-sided market – and more important, the activities that influence success. This can best be articulated in a framework that has come out of an ongoing research project that can be used to better advise communications and media clients as they work to make convergence a reality – this time. This five-part process is iterative in nature, but designed to create a strong foundation around which to evolve a multi-sided platform market. Here’s a quick overview of its guiding principles: Creating Success With A Multi-Sided Market Framework * 1. Identify platform communities –understand the parties to the transaction, their incentives and related dependencies * 2. Establish pricing structures – understanding demand substitutes, incentives and demand responsiveness; * 3. Create a profitability roadmap –model demand responsiveness, create the ROI baseline, understand payback periods and assess risk. * 4. Implement an incentive structure – craft the business case and go to market model, develop market positioning and value propositions for each group of customers * 5. Experiment and evolve –craft and implement a trial, prototype and/or launch strategy that includes clear success measures. The Final Word For all the talk of the need for new thinking in creating successful multi-sided markets, there is one traditional business axiom that can be applied with confidence, that of risk and reward. Along with what is surely greater challenges, also go greater rewards. There are successes in the communications industry already, and surely more will emerge. DoCoMo’s I mode service is touted as the business model to emulate in this market. Millions of subscribers later, they are turning a profit and adding new content partners with great alacrity. Only time will tell though if that model is one that will work for other service providers. One thing is certain, their success to date is a function of understanding the platform community in which they operate: they have successfully recognized what is necessary to get and keep all sides on board. Many of today’s successful global business behemoths have succeeded because they have excelled at making multi-sided platforms work to their advantage. It’s now our turn to take our place beside them.

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