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The Critical Path #112: Business Model Diversification

We examine Facebooks acquisition of Whatsapp: What’s being acquired? Resources, processes or values? We also begin a look at The Capitalists Dilemma.

via 5by5 | The Critical Path #112: Business Model Diversification.

  • Sacto_Joe

    I’m only part way through, but I did feel the need to make one comment. The weakness that you identify for Facebook and Google is in fact different from the weakness of Microsoft, but there is also a similarity. In all three cases, it’s about slowing or shrinking revenue growth from their primary revenue streams. For Facebook and Google, that’s advertising, while for Microsoft, it ‘a software. Microsoft has been a virtual monopoly in software, either by virtue of its control via its OS or by virtue of its in-house software which it’s OS has given serious advantages to. That software revenue stream is now in the process of being commoditized, originally by Apple and now additionally by others.

  • Sacto_Joe

    Two-thirds through, and Horace just pointed out the craziness of valuing Apple iTunes and Retail at zero, simply because they’re integral to what I call the Apple ecosphere. I’d add that Horace has for years now spoken of how Apple is not valued on its potential growth, and that IMHO it’s only partially valued on its cash. But concerning the iTunes Store, on a net income basis it probably is a drag on Apple’s margin. However, it’s true value is in an intangible form.

    Perhaps that’s the reason it’s not valued: Money people, in my experience, don’t like valuing intangibles. It might also explain in part why Apple’s cash isn’t valued more; money people don’t see it earning anything tangible.

    Regarding this last, I don’t think it’s an accident that AAPL’s value has gone up as Apple has demonstrated a willingness to use that cash to increase AAPL’s long term value. Buying back seriously undervalued AAPL is the same thing as decreasing the number of shares net profit will over time be divided by. And the more the shares are devalued when they are bought back the more bang per buck Apple can apply. Of course, only a company that has huge gobs of cash it can expect to keep coming in, year after year, can afford to play this game. Fortunately, that is in fact the case with Apple.

  • Walt French

    I was so happy to hear Horace talk about ads not being able to deliver enough value to finance the oh-so-much bigger internet. When we hit 90% smartphone usage, and given the hope of the internet of things, we’ll need to retire the notion of “internet”—the same way that the air all around us was one of the most important, but unobserved physical phenomena for centuries.

    Interesting that both FB and Google wanted WhatsApp, suggesting that Google sees itself headed down a dead-end path if they keep on their current tack.

    I even think ads may decline in value, as businesses find more effective ways of drawing in consumers thru Facebook or the like. But while I think iBeacons will be part of the way businesses communicate better to users, the stuff I hear from VC types is preposterous.

    An ad with specials when you’re at the front door? Who gets some friends together, who wander around downtown and pop into a place because it has Texas Turkey Chili for a buck off? More likely, you meet somewhere and find the wait is 45 minutes to an hour, so you want alternatives to the place you’re standing in front of—maybe the same vibe, maybe closer matters more. This is going to be more of a challenge to Apple, who builds devices for consumers, not advertisers or Groupon promoters, to help you find what you want, rather than be subjected to the cacophany of “BUY ME” push notices. And absent some stunningly clear vision, it’ll take some time to work out so that Siri is about 10X as helpful as today.

    • charly

      Why offer $1 off when the wait is 45 minutes? That doesn’t make financial sense.

  • http://www.isophist.com/ Emilio Orione

    I don’t believe iTunes store won’t succeed outside of Apple, only apps are tied to iOS devices, not music, or movies or books.
    If iTunes without apple could still be a service for mobile and fixed computer users, serving media and apps for whatever device.
    The current zero valuation is a mistake, itunes is a business in apple like the iphone or the ipad and carries a potential of growth that is even greater than the iphone or the ipad, especially if tied with iBeacon and mobile payments.

    • charly

      Apple software for Windows has not a good name. Apple pricing isn’t better than Amazon etc. so why would anyone want to use the itunes store if they are not on iphone/pad?

      • http://www.isophist.com/ Emilio Orione

        Because they already do. The ipod sales are not only to mac users but for the most part to windows users that use iTunes.
        iTunes for music has a lot of unmatched services, like iTunes Match, Genius playlist, iTunes radio etc.., if iTunes is turned to a universal app, not only iOS, iTunes could get share outside apple devices also on mobile and not only on desktops.

      • charly

        Ipod is a legacy business used by people who go to the gym. People who listen to music want pandorra, deezer & spotify, not iTunes

      • Samrobinson

        iPod (non iOS) still sell more units than windows phone. Apple’s dying business that the are willingly disrupting themselves is bigger than MS phone business which includes more jobs to be done. Think about that?

      • http://www.isophist.com/ Emilio Orione

        The iPod business is finishing because it has been disrupted by iPhone itself.
        (and iphone too can be synched with itunes (at the beginning it had to be synched))
        But the number of iPod in use is huge and the number of ipod sales is still quite big even if declining. Those people use itunes in big numbers. Your idea that itunes is not used is not based on data but on wish.

      • Kizedek

        Granted, it may not at the moment have a great name (due in large part, apparently to the fact that iTunes on OS X likes to spawn its own processes and Windows bundles these up into system processes)…

        To make a real go of it as a stand-alone business, Apple would have to improve the software on other systems. But Apple would have to really want to go that route, as opposed to using iTunes mostly as a way to add value to their own hardware. Just as MS has to really want to go iOS with Office and “unbundle” their Office business from Windows.

  • stefnagel

    Notes on Whatsapp purchase:

    Why would Facebook (Google) pay so much for Whatsapp (Nest, Moto)? Was it about processes, resources, or priorities? Would Whatsapp have gotten anywhere near this price on the open market?

    What deep insight or need would motivate paying 3-4 times what Whatsapp, Nest are worth?

    If priorities, what priorities? a business model? Perhaps ads: Will ad dollars continue to support Facebook and Google? Is there another way, non-ad, to profit from large people using an online service? Whatsapp does, in fact, get paid for messaging, just as Apple gets paid for gadgets.

    Should Apple make acquisitions like this? Apple sets no value on its own messaging service, while Facebook, and Google, pay exorbitant prices for the same size service. Why?

    1. Why would Apple abandon 600 million of its hardware buyers for a buck a year service?

    2. Does all this suggest that Facebook and Google has unsustainable business models? Are they remodeling their business models, away from ads? Do Sergey, Larry, Mark want to be remembered as mad men?

    • Walt French

      @stefnagel writes, “Apple sets no value on its own messaging service or even on its iTunes or retail businesses…”

      One of my issues with functional/integrated reporting is that most organizations need the profitability signals from different groups to know where to invest resources. Price the iWork suite at $0, and you have a very hard time telling how much your bottom line, driven by Mac and iPad sales, would go up or down by making iWork more accessible (less costly) or creating templates, etc. that would justify pricing it higher. It takes an incredible sense of the usage models — of users’ different and even contradictory preferences — to decide on questions such as integrating FaceTime more tightly or whatever.

      The evidence is that Apple the company is doing pretty well despite the absence of price signals, despite the utter absence of external reporting that’d help analysts better understand their hold on customers, their growth outlook, their sources of profitability; i.e., how to value Apple the stock.

      • stefnagel

        OK. If integrated reporting’s a problem, Google is screw ed. My concern with further unpacking Apple reports is that Mr. Market would try to micromanage Apple, even more than it does. And Apple seems worried about what analysts think less and less.

  • stefnagel

    Horace’s teases about the roundtable review of Clay Christenson’s research on the capitalist’s dilemma. In a quants world, our financial overseers will never get Apple, which is very intuitive and introverted and focused and quality, not spreadsheets.

    As it approaches 1 billion subscribers to its ecosystem, Apple will need to think about these broader implications re: power and values. Horace, love to hear your thoughts on what Apple will look like at a billion users. Nothing utopian but the dynamics at play in mega, meta business.

  • Karthik

    Hi Horace. I don’t understand your comment on FB launching a $5.99 service next year vs. Having to buy WhatsApp for $19B to do that. What do you think they will learn from the by buying it that they can’t just by seeing their popularity at 0.99 a yr (which I am sure a minor chunk of the 450 million Subscribers pay)

    • http://www.asymco.com Horace Dediu

      Whatsapp has significant data on the conversion rate and the sustainability of the model. For FB, the experiment of switching business models could be very costly. See their fumble with building their own Android UI (and their previous failure at building a web app infrastructure.) FB could stand to lose huge numbers of users and indeterminate brand value from mishandling the switch.

      • Karthik

        Thanks for replying, Horace. Wow. Still hard to fathom that FB bought them for $19B despite knowing that as a public company WhatsApp isn’t worth that much. Looks like they are damn sure that in 3-5 yrs What’s App will be at a billion users and will be worth a $100B (who knows). Atleast that’s how the growth graphs look like for What’s App.

        Looking fwd to the Capitalists Dilemma review

  • Bruce_Mc

    I have been thinking over the statement that Google and Facebook’s business model cannot last for long. I was trying to envision a graph with two lines: 1) total global advertising spending per year 2) total internet advertising spending per year. Graphing these values over the last 10 or 20 years would be interesting.

    I don’t have good data to do this. It looks like global advertising spending grows at around 3 percent a year, which is not much yearly growth compared to Google and Facebook. However it looks like Internet advertising spending is somewhere between 5 and 20 percent of the total. That suggests that there are at least a few years of strong growth in Internet ad spending left before it is constrained by the total ad budgets of all advertisers.

  • http://www.philsimon.com/ Phil Simon

    $19B is a huge sum, but Facebook is at least willing to experiment. Amazon, Apple, Facebook, and Google have all demonstrated as much. That’s a big reason for their success. Sure, this may not ultimately solve The Innovator’s Dilemma.

    Platform thinking is predicated upon adding new planks.

  • Ian Willmington

    WhatsApp purchase is the second iteration of the Facebook home product which is the attempt of making every phone a “facebook phone” no matter what brand of phone or brand of carrier the phone is on. Software is universal across carriers but not across platforms so the fact that WhatsApp is popular on iOS, Android, Windows BlackBerry and many other platforms is probably very attractive to Facebook. If you’re Facebook you can make WhatsApp a standalone subscription app and market the subscription cost of $2 or $5 or $10 a year for unlimited use of WhatApp as a complete and total replacement of texting monthly charges. If WhatsApp adds voice over data capability you can market the app to the hundreds of million monthly users as a complete replacement of voice/text monthly costs. In a sense Facebook trying to become a new telecom software carrier without all the dirty business of the infrastructure and burden of maintaining the vast and complex network of cell towers. What do you think Horace?