Why Ecosystem Economics (TM) is Key to Business Success
Whether you are a start-up or a Fortune 100 corporation, your success is tied to your ability to understand and partner with your Natural Allies in the market and how to create growth in a network world.
By understanding the landscape of business in 2011, you can gauge your readiness. Here are the 5 departure points:
- There is a fundamental network-orientation to all business and life today that goes much further than just the Facebook phenomenon. If one is still thinking hierarchically or linearly, one should update one's thinking.
- The consumerisation of technology has changed how new products and services are adopted. Skype, which sprung into the market in 2004, and which my firm Ariadne Capital advised at that time, offered free calls on the web. Before then, you would adopt IT in the office, and perhaps bring it home. After that, it became common that you adopt an online service and force your work environment to deal with it. Now everyone buys their iPad, iPhone as consumers first, and enterprise environments have to be accomodating to this individuality.
- Each 60 years or so there is a moment of disruptive technology. The raise of the commercial Internet was one of these in the early 1990s. We can, however, go back throughout history to review these from the printing press hundreds of years ago to the microprocessor in the early 1970’s. Today is not a period of disruptive technology. Today, social and economic institutions are embedding the disruptive technology of the web in our lives. Even through the dotcom bust of 2000, the telecoms downturn of 2001 and the financial crisis of 2008, broadband and mobile technologies continued to penetrate our lives.
- Technology operates exponentially (and has network effects) while our minds operate linearly. It took 89 years for the fixed line telephone to achieve an adoption of 150 million users, but only 38 years for the television to get to the same point. The mobile phone achieved this in 14 years, the iPod in 7, and Facebook in 5.
- There are 5 stages of company development, and strong norms for milestones achieved for valuations expectations.
- concept; I call this the "dinner party stage" as many people have ideas that they share with friends over dinners, and they never do anything about them.
- product or consumer behaviour insight; A smaller group of people put together a beta product. The success here comes down to whether the consumer insight that the entrepreneur has is a good one.
- business model validation; The business model - or how you tax the product - must be separated out into a separate stage. You could have a good insight into consumer behaviour but not have figured out how to monetise it correctly. Isolate to get to accuracy.
- scaling on the back of corporate partnerships, app stores or innate virality of application; the big difference today versus 12 years ago in terms of high-growth businesses is that no venture capital firm is going to give $30 million to acquire 30 million customers. You have to do that on the back of building the right partnerships with corporates - either existing app stores like Apple/iOS, Android, Amazon, Facebook, Salesforce or others.
- exit or sustainability; this is where after 10 to 15 years of growth typically a company becomes so cash positive that they are simply sustainable. They may get acquired here for strategic reasons or they may go public.
With this landscape in mind, we can then observe what has made companies successful over the past 20 years of the technology industry. In addition, we can note the fundamental reason why companies like Apple and Google have created dominate market positions, and what this means for your journey as a captain of your ship.
Successful technology firms in the 1980’s and 90’s created alliances and early ecosystems. They attempted to create lock-in through hardware/software tie-ups like Wintel (Microsoft/Window and Intel’s long-running dominance of the PC space.) Their interoperability made them a de facto standard as developers flocked to the dominant place where their applications would get traction. Many tried to dethrone Wintel including the early attempt by IBM, Apple and Motorola in the Power PC alliance in the early 1990’s by creating new ecosystems. The PowerPC alliance failed because of the dominant standard of Wintel. New OEM's wouldn't adopt a new chip or system without the assurance of the software developer community following.
Many formerly successful technology firms, Lotus and Sun Microsystems created other niche ecosystems (think solar systems for the alignment of bodies from developers to OEM’s to ISV’s). QualComm did the same in the semiconductor arena, and has been one of the most effective ecosystems ever created in the technology and telecoms worlds. Many tech firms' 15 minutes of fame were tied intricably to how well they built and locked in their ecosystems.
These dominant positions arose through standards and compatibility, and effective monopolistic positions arose as a result, particularly in the situation of Wintel. While the young Apple of the 1980s and 90s had an early ecosystem and cult following, they functioned as more of a silo as it wasn't compatible with the Wintel standard in the PC world.
Today, the behemoths are Apple, Amazon, Google, and Facebook have achieved their dominance because of several factors. They understand that consumers are adopting their products and services - not enterprises - even if ultimately the consumers import their phones and tablets into the office. More importantly though, they are winning because they are organising the economics of the markets and industries in which they operate.
Steve Jobs' legacy will be equally about the beautiful products his team created as well as the fact that he took on two industries where innovation was stifled in the early part of this century - music and mobile carriers. Large companies (record labels and mobile carriers) were dictating the economics, and Jobs/Apple cut a different set of economics for the industries. He cut in the little guy (the artist, the publisher, the consumer of music, the developer), and reworked the business model for the industry, with Apple winning as a result. Now the new music industry goes to MacWorld as a result.
Similar lessons can be learned if we analyse Google’s market position. Google say that they organise the world’s information. Actually, they do a lot more than that. They organise the economics of the world's information. They use our data - albeit anonymously and in aggregated form - to cut a set of economics for the search and advertising transaction, and give no consumer any economic benefit for the use of their personal data. They have organised the business model to their exclusive benefit. While they cut those who advertise in and the advertisers, the lion's share of the profits go to Google. The individual is invisible to the economics of the transaction, and yet they are fundamental to it as well. Their biggest Achilles' heel would be if another party came along and cut a different, more inclusive set of economics for the advertising transaction.
I found that entrepreneur in John Paleomylties who ran BeatThatQuote, a financial services price comparison company, who was challenging the business model of the advertising industry with his cashback deals - giving the individual a share of the economics which the use of his personal data was generating. Ariadne Capital, my firm, was the sole financial advisor on the sale of BeatThatQuote to Google for 122 EBITDA multiple on the 4th of March 2011. Why would Google buy a company that had £250,000 of EBITDA for £37.7 million unless its proposition threatened its business model?
Ariadne Capital understands networks perhaps more profoundly than most investment firms as my previous firm, First Tuesday, was a network of entrepreneurs which became a dominant place for Internet 1.0 entrepreneurs to meet in the late 1990s across Europe – with numbers soaring to 500,000 each month at First Tuesday events at its peak.
That heritage provided us with a headstart to recognise the emergence of ecosystems and their importance in the early part of this century.
So when we met Alastair Lukies, the founder and CEO of Monitise, then part of the Morse Group in March 2004 with his vision for building the ecosystem of mobile money, we were open to the idea that it might work. This despite a competitor’s demise at the same time – that of SimPay which had been favourably seen in the market.
Monitise enables you to access your banking from your mobile phone – agnostic on all levels to bank, carrier, device. This is – I would argue – the most natural way of checking your balance, transferring funds, remitting cash - not interim services like PayPal Mobile, or cash cards.
The genius of Monitise was not to attempt to disrupt the banks, but to enable them. Lukies helped the banks get into the world of mobile money. His partnerships with VocaPay in the United Kingdom, where Monitise originated, gave him a rail into the bank’s systems. From there, he was able to get any mobile banking transaction to be treated as “just another ATM transaction” – a piece of both technology and business brilliance.
Lukies also felt that if mobile money was going to be an industry, it would have to “work for everyone” – the banks, the mobile carriers, the users. That simple “win, win, win” attitude has created a monster firm.
So while many of Monitise’s peer group focused on selling software to banks, Monitise built the tracks for a mobile banking ecosystem. Lukies thought long-term – very long-term. He dared to believe that he could create an industry.
Today, Monitise power more than 250 financial institutions, and every 20 seconds, a Monitise service is used by someone in the world. VISA have backed Monitise 4 times, and other institutions such as Standard Chartered Bank, PCCW, Flemings and Co have also become shareholders.
Why are they winning? Simply put, Monitise and Lukies have organised the business model for the industry even while creating the industry. More than that though, they have organised a set of economics in which each of the parties in the mobile banking transaction win - the banks, the carriers, Monitise, and the individual who gets a much lower cost of capital than a substitute, Western Union, would give them charging them upwards of 25% to transfer money abroad. As a result, the industry embraced and validated both Monitise’s ecosystem and “Ecosystem Economics” TM, Ariadne Capital's horizontal industry framework for understanding why companies win.
Monitise’s market capitalisation is now north of $400 million due to the fact that they are growing the industry, not just extracting value from it. While they sit in the middle of each transaction, and take a cut of the transaction’s value, the network effects of the ecosystem mean that there is a growing significant disadvantage to being “outside the Monitise network”. Banks will receive a share of the new digital revenues flowing through the mobile phone as Monitise and their partners launch the Mobile Money Network with partners BestBuy in late 2011.
“Ecosystem Economics” explains why Monitise is winning as well as Apple and Google’s dominance. The winners of any industry are those companies who build the business model for the industry so that all of the parties in the transaction can participate in the economic upside. In a world of multiple dependencies – which is what networks imply - consumers, developers, and users will flock to the systems which incentivise them to participate.
More importantly, though, “Ecosystem Economics” is a set of glasses for looking horizontally across any industry and assessing the players in that market, and determining their capacity to win.
Let’s go back to the 5 Stages of Company Development.
Many of the start-ups who are building enabling technologies will be funded by the venture capital community and will offer applications which consumers want. The entrepreneurs behind these “digital enablers” will have an insight into their vertical (whether healthcare, travel, leisure, music or something else) and consumer behaviour, and understand this fundamental network-orientation or world of multiple-dependencies in which they’ll have to get any deal done to take their company to market. As start-ups, these insights help them to overcome the asymmetrical nature of their position vis-a-vis the established industry.
The established players in every vertical need to identify and secure the new digital revenues which come from the digital enablers. This tends to happen best by partnering with smaller, more high-growth firms than innovating internally. But this doesn’t mean, necessarily, that these established firms, or Goliaths, need to buy the digital enablers, although many times they do.
Depending on how switched on the Goliath is in terms of understanding the landscape of networks and ecosystems, and depending on how far the “digital David” (digital enabler) has travelled through the 5 Stages of Company Development, when David and Goliath do a dance, the transaction can be more or less expensive for either party.
Goliath sometimes feels that he can choose the moment he engages with digital business models. We’ve seen companies die from this fatal delay – such as Borders, many newspaper groups, car companies, fashion retailers, record labels and telecoms firms.
Skype was acquired as they were scaling rapidly in 2005 by Ebay (their first acquisition). Because they had successfully traversed 4 phases of company development in 2.5 years, there was a huge premium to their acquisition. The strategic value of what they promised to Ebay was massive despite the lower financial value at that time.
There was a lot of amazement when LinkedIn went public earlier in 2011 at a $10 billion valuation. And yet why should we be amazed? The company had a transformational insight into consumer behaviour: everyone is always looking for new opportunities or a job. They may not want to send their CV to a recruitment to be actively on the market for hire, but they will passively promote themselves through LinkedIn. They clearly understood that the world had "gone network", and they made it all the way through the 5 Stages of Company Development. For people who have never worked in a start-up, they may not realise how fraught they are with near death experiences. At many stages along the way, LinkedIn, Monitise, Apple or Google - in the very early days - could have been squashed like a mosquito on the sidewalk. Companies could have taken them over if they had not underestimated them as Goliath tends to underestimate David. But when LinkedIn makes it to its IPO, part of the premium is a Darwinian "fittest survive" premium for having crossed the finish line into sustainability.
So what does this mean for how you build your firm?
The fundamental question to ask (whether you are David or Goliath) is - "In whose interest is it for me to be successful?" There are always Natural Allies for your success, but you may have to think laterally, and find the adjacent, non-obvious players for your game of chess. One of the advantages that the "Digital David's" have is that they know - if they are smart - that they are playing an asymmetrical game, so they are very focused on finding their Natural Allies. Goliath tends to not realise that the game can change as quickly as it can. At the time that Skype was climbing towards 10,000,000 million users daily, (late 1994), I sat at a lunch with the CEO of a major incumbent telco who failed to grasp that the telecoms world was in freefall due to this young upstart, Skype, of which he was dismissive.
But companies have to not only find their natural allies, but they also need to organise a set of economics for the transaction in their industry if they want to become dominant. This may come in a variety of ways. Companies can share investment into building an ecosystem and the exploitation of that. If they keep the customer top of mind, and focus on growing the pie as opposed to defending existing revenue, they have a good chance to win.
Ecosystem Economics (TM) refers to the business model design and implementation in a network where the economics are inclusive/shared such that the consumer and each party shares in the upside. This happens because of a digital enabler ("powered by" enabling technology application), and a brave management team.
The next decade will see the emergence of new business ecosystems in smart cities, mobile money, digital health and broadcast media and entertainment. Europe and the UK, who have had many fewer ecosystems in the technology world than the US, have a unique opportunity to pull ahead through business model design and implementation. European companies such as LivingPlanIT, Monitise, and Rovio are companies which have the capacity in terms of leadership and market position to be at the center of those ecosystems.