Mar 7, 2013

Two Aspects to Business Model Innovation

New business models and business model innovation have become very topical in the M2M industry over the past year. Now, companies are talking less about eye-catching use-cases and more about the business of commercializing the most promising ones. The IoT market, currently preoccupied with cool and quirky devices, has yet to make this transition.

For any company in the M2M market, there are two aspects to business model innovation. The first deals with business-unit organization at a corporate level. The second applies to any special approach that is needed to capitalize on a specific market opportunity.

Business-unit Organization

A very basic value chain for M2M and connected device applications involves these entities:
  • connectivity providers (typically mobile operators and specialist M2M service providers),
  • companies that are embedding connectivity in their devices and services (e.g. an eReader provider or a remote health monitoring service provider),
  • and, the end user (either an enterprise or an individual consumer). 

Historically, connectivity was often provided as a wholesale offering. This is how several mobile operators have organized their M2M activities especially where they lack the resources to invest in their own retail channels. As the addressable M2M market has expanded, there has been a greater shift to direct-to-end-user business models as explained below.

At the far left, there is the wholesale approach where connectivity is offered to an entity that embeds connectivity into its products and services. An example might be a mobile operator that provides connectivity services to a vehicle manufacturer which it uses to operate its own vehicle telematics service. In addition to wholesale capacity, some connectivity providers also offer complementary services such as hosting, for example.

Toward the right hand side of the diagram, other models involve the connectivity provider working directly with other businesses to offer a connected service to end-users. This typically involves some form of partnering and risk/reward sharing using one of a variety of approaches. Examples include: opportunistic partnering; formal co-marketing and joint-delivery arrangements; and, the creation of stand-alone joint-ventures.

To the far right of the diagram is a model where the connectivity provider supplies and supports a service directly to end-users. This can arise when the connectivity provider sees value in managing the customer relationship, possibly to enhance or expand an existing commercial relationship. Such an outcome can be justified in the case of sizable and loyal customer base as well as the potential for higher revenues and profits. The conditions for this kind of retail approach are likely to arise as M2M extends into the consumer segment. An example of this is in personal health care services, for example, where customer numbers, the value potential and economies of scale are comparable to the market for mobile broadband. However, there is a difficulty in capitalizing on this type of market opportunity because of the need to leverage non-mobile expertise in crafting and operationally delivering an appealing value proposition.

The choice of approach to use depends on corporate strategy priorities. Most communications service providers have a wholesale offering and many have experimented with partnering. At a corporate level, the issue for many providers, however, is to determine the optimal mix of wholesale and on-wholesale approaches. And, in the case of highly promising segments there rises the challenge of designing a specific approach somewhere along the spectrum of partner to pure-retail models.

Business Model Innovation Around a Specific Market Opportunity

We now come to the second aspect of business model innovation, this time in relation to a specific market opportunity. An opportunity may be promising for a variety of reasons such as: high volume potential; because it helps to improve a company’s’ position in the value chain; prospects to improve customer retention; and, as a means of capturing higher customer spending from digital customers that value a broad and integrated set of services.

To clarify the design issues, let us consider a new business model around an example service – digital display advertising. This example falls under the category of connected marketing and advertising. According to a recent Cisco study, the value potential of this market is $1.95 trillion for the period covering 2013 to 2022.

Most countries have sizable and growing populations of outdoor advertising and information displays. Increasingly, many of these are digital and some even include remote interaction features. A mobile operator might view this as an attractive market but one that is not core to its M2M strategy. In this case it could sell wide-area connectivity, on a wholesale basis, to an outdoor display supplier or an advertising sector systems integrator.

A different operator might view outdoor display media as a way to deliver a dynamic advertising service. Tailored advertising could be served in a particular based on an analysis of individual and aggregated customer demographic data; eventually, it should even be possible for individual users to interact with advertising content. This concept is not far removed from Tesco’s Clubcard TV which targets advertising based on an individuals’ Clubcard history.

We now have two contrasting views of the market opportunity; one involves a wholesale approach to enable digital displays while the other entails a more complex model to deliver a dynamic advertising proposition. Each of these value propositions represent the seeds to define corresponding business models. In the context of this business model design framework, we can identify two distinct value propositions targeted at specific customers.

What is the value proposition and target customer segment?
1. Value Proposition Wide-area data connectivity for digital displays (to enable status monitoring, delivery of advertising content etc.) Platform service that enables dynamic advertising as well as permission-based advertising using (consumer) mobile user profiles.
2. Target Customer Segment(s)
  1. Outdoor-display management agencies
  2. Systems integrators
  3. Public-space landlords
  1. Advertisers and agencies
  2. Public-space landlords
  3. 'Opt-in' mobile (consumer) users

The complexity of the dynamic advertising proposition is already apparent in relation to the diversity of its target customer segments which comprise companies that want to promote advertising content and consumers of advertising content.

The next stage in designing the business model is to establish how each of these value propositions is delivered as a service to their respective target customers. The next table includes illustrative suggestions for the distinct distribution models and means of managing customer relationships.

How will the value proposition be distributed and customer relationships managed?
3.Distribution Model Direct sales to intermediaries Multi-channel model using professional sales (to advertising sector business customers) and consumer marketing to build-up a user base (own and other-operator subscribers).
4. Customer Relationship Model
Traditional enterprise account management
  • Enterprise account management
  • Co-development of advertising campaign processes
  • 'Loyalty' membership approach for consumers

The actual resources, processes and assets required to fulfill these distribution and customer management goals are the next few elements of the business model that have to be defined. Some of the approaches this could entail are highlighted below.

What operational delivery assets underpin the business model?
5. Key Resources Back-office systems geared to wholesale connectivity and billing activities
  • Platform to serve advertising content dynamically
  • Trusted brand (to appeal to broad range of consumer users)
6. Key Processes
Operations support for wholesale air-time
  • Data analytics (to match customer demographics in a given location to relevant advertising
  • Audit capabilities to evaluate advertising effectiveness
7. Key Assets
Back-office systems geared to wholesale connectivity and billing activities
'Opted in' customer base

As a result of defining these delivery dependencies, the cost structure for the particular business model is determined. At the same time, the different ways of monetizing the value proposition also lead to a first assessment of the revenue potential. As listed below, the dynamic advertising proposition offers more scope for new and higher revenues compared to the wholesale, enabling of displays offering.

What are the resulting cost structure and revenue opportunities?
8.Cost Model Optimized for low operational maintenance and 'bit-pipe' traffic
  • Initial service phase driven by 'market making' to acquire advertisers and base of digital displays
  • Consumer acquisition and retention costs
9. Revenue Stream(s)
  • Fee per connection
  • Data usage fees
  • Design and implementation fees
  • Ongoing fee for a service (to multiple customer segments)
  • Market intelligence fees from data analytics of customer base 

After detailing each of the nine elements of the business model, the business case has to be assessed in terms of its viability and commercial attractiveness. This is typically an iterative process to adjust the business model and optimize its commercial profile. For example, it may be that a sizable capital cost for a key asset may be avoided by partnering with another company. Alternatively, the capability may be available from another provider as a “Software as a Service” offering; this is how several mobile operators have ‘in-sourced’ M2M connectivity management platform capabilities. These types of trade-offs results in greater or lesser influence over the service offering and customer relationship; they also affect how quickly a company is able to enter a given market and fend off potential competitors.

Returning to the opening issue of whether companies in today’s M2M market need new business models, the answer for growth-oriented companies is clearly ‘yes’. This is because of the growing range of service opportunities that M2M enables by turning standalone equipment into ‘smart’ devices.

The process of implementing new business models requires innovation which can be achieved along several different dimensions. As a result, companies have many ways to differentiate themselves in the market and to ‘de-commoditize’ data connectivity.

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