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Google, Facebook, Value Chains and Our Future in Business

  • Rome yesterday, Paris today.  Planes, trains and automobiles…  I only have myself to blame and the TMF to thank!  Anyway, I hope you can bear with me – here is my New Years “Rant and Pontificate”.

    (C) jscreationzs

    I began thinking about the difference between planes and trains and automobiles (preferring trains as I am neither a pilot nor an Englishman).  My thoughts began to (re-)obsess on the difference between services (planes and trains) and goods (automobiles).  Over the Christmas break, I began thinking about the new service industries and how they can have intriguing and yet clumsy business models at the same time.  Business models in the modern goods industries – though admittedly less interesting – are far from clumsy and would make Deming proud.  I am not sure what he would say about modern service industries.

    Not to pick on Telecommunications – but I think that “content” based business processes helps me make my point.  Neither the content owners nor the Telco’s aiming to sell their content have succeeded. On one hand content owners found the Telco’s to be torturous business partners and few successful deals were cut. On the other hand people refused to buy the content at anywhere near the price demanded. 

    Even if you could erase from history free content provided by YouTube, Internet Radio and Napster – I wouldn’t see things changing.  People would still have found a way to purchase content directly from content owners. Service providers selling services they do not own have not been effective – or at least effective enough to compete with advertizing and goods based models (and I consider AppStores as a good based model.

    Let me digress on advertizing based business models… 

    (C) renjith krishnan

    Google and Facebook ( G & F ) are really just the modern incarnations of the billboard – that huge sign on the side of the highway touting tourist traps, casinos and “Channel 7 Live Action News at 6” (I remember the highways in the US in the 1960’s before the big backlash against billboards - it was ugly and intrusive).  The difference being is that G & F have “splacked” almost everything except the physical world with ads - your virtual versions of your local library, your kitchen bulletin board, your main street, your job board, your high school trophy case… And you have to know that VC’s are just waiting to invest in someone who discovers a new virtual wall on which to litter their ads (in hopes they are bought by the big boys for a huge premium).    

    We have to ask whether the value to society of the new “walls” erected by G & F  is sufficient compensation for the harm the accompanying ads do to our “environment”.  Moreover, by making every wall free (maps, academic articles, video clips…) and making them generic, they are crowding out organizations (private, charitable and community) who want to create unique “local” value.  It’s like Holiday Inn bulldozing its own road to all the world’s beauty spots to build their hotels and then nailing personalized (aka creepy) advertisements to each cliff face and every other ancient Redwood.  

    There are some features of G & F that do foster communities – making it easier for virtual mom and pop shops and trade rags to sign up advertisers.  But I need to be convinced that these indirect and direct ad models are not cannibalistic – incentivizing G & F to really allow them to thrive.  In other words, is having Vimeo use Google to manage its ads sufficiently interesting to Google to allow it to co-exist with YouTube?  Or will Google try to out beef up YouTube to outcompete Vimeo or just buy it outright.   Advertizing business models thrive on scale just like any business…. Monopolization of cultural places from which ads can be hung is a natural outcome.   Where are G & F leading us? 

    Oops…. Back to the subject at hand: service industries.  My premise is that service industries are not as effective as goods industries. To be more precise: service industries are not as effective when there is a supply chain.  For instance, telecommunications did well as long as they were both “producer and seller” but began to suffer when they had to resell services from other “providers”.  Looking back at the 2001 Telco crash, not an inconsiderable part of the problem began with the collapse of pyramid like interconnection chains in simple voice.

    There are a number of challenges that service industries face that their goods based equivalents do not. These may sound a bit theoretical, but bear me out:

    The supply chain:

    • The goods supply chain is just that a chain.  Once a link is built, a supplier’s contribution is complete.  The chain looks like “use resource àuse resource to create good à sell good àbuy good as resource àuse resource to create good à sell good àbuy good as resource à….”.   Each link lives independently in time and needs to understand only see one step forward and one step behind.   Commercial arrangements are shortsighted, simple, easy to negotiate and effective.
    • Services chains are really flows – a consumer of a service may depend on every other service provider lower down in the value “chain”.  You cannot consume video content without immediately impacting the entire chain from Retail Service Provider (MVNO) to Network Service Provider (MNO) to Content Aggregator to other Network Service Providers to Content Service Provider… 

    The cost model:

    • Goods arrangements are symmetrical – for every unit sold there are corresponding units bought. Margins are a matter of arithmetic. Not completely trivial – or else ERP systems would not exist – but still a matter of “+’s” and “-‘s”.  Allocation of shared capital and operating costs makes the job more difficult but it is still tractable and within the realm of a G/L.
    • Services are asymmetrical – there is no 1:1 relationship between what is consumed and what is purchased.  Many service costs are not discrete (i.e. Network) and frustratingly they may be shared across multiple “deliveries”.  Of course, if the service provider produces 100% of the services sold (i.e. in the old Telco world) the problem will boil down to allocating capital and operating costs, (back to the world of ERP).  But where 3rdparties provide services and these are shared amongst many end user products – margins are very obscure.  This is true no matter where you sit in the flow –reseller / aggregator / wholesaler…

    The contractual model:

    • Goods contracts hone in on price, quality and timeliness.  Deliver me the right good at the right price at right time and of the right quality. Failure is easy to detect and remedies easy to define. 
    • Services are the same – but quality and timeliness are only in partial control of the provider.  The solutions may involve “back to back” service level agreements – where remedies for faults by one service provider can be passed back to constituent suppliers.  Most commercial enterprises hate these arrangements….more often than not there is a hand wave and risk management is inadequately addressed.

    The revenue models:

    • Goods are built up over time but services are built in the moment. Revenue arrangements at each link in the chain live independently.  It is relatively easy to invoice for goods sold to align with material purchased (JIT being a big boost).  The art is in production planning – not billing and sharing. 
    • Services usage involves each service provider (contributor) immediately and simultaneously.  Services are by nature JIT – production planning is really flow management and intractable to supply management. Demand based policies based on billing and SLA are the only degrees of freedom.

    I probably chose the wrong example above with Content.  The Cloud – very much a complex service flow - is a much better example and obvious to Telco readers.  Services are very embedded, very immediate and very far from goods models.  But service flows are popping up everywhere – here in the UK the AA is selling a hybrid “all you can eat” home repair service that is partly insurance and partly a resale of “a man and his van”.  Bundled Financial services (BNYMellon) that mix transaction and non-transactional services are becoming more important.  Energy firms are reselling alarm services.  Alarm services companies (ADT) are providing energy management. 

    The question for me is whether the current conceptual framework used to build enterprise applications in the service industry is wanting.  I suspect it is.  We need to step back and look at billing, finance and planning business systems… how do we get them to address “value flows” where they now excel in “chains”?

    Anyway… there goes my New Year’s resolution (at least I gave “Larry Rants” a break)….  So with that: “Prospero Nuevo Año”!

    Douglas Zone
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