“Permanent connectivity, not motion, is the critical thing” Manuel Castells, Annenberg School for Communication
It is safe to say that mobile regulation in Canada represents a huge opportunity as the foundation for much of our future economic prosperity. It is ironic that such a geographically dispersed country, once the world leader in telecommunications through to the early 1980’s, should abandon what should be a natural competitive advantage.
Why Did the Internet Succeed?
One might expect that the mobile world would replay the software revolution dominated by Microsoft and the Internet/Web revolution of the 1990’s. Unfortunately, the mobile world is too closed for that replay to happen and, to understand why, it is instructive to look back in time.
The opportunity to create the modern software industry, separate from the then dominant computer hardware industry, emerged because of an IBM Consent Decree first concluded in 1956 and strengthened by increasing anti-trust action through the 1970’s. This regulatory action ensured that IBM, although dominating the computer industry, had to publish open specifications for their hardware and price software separately from hardware. Thus, in some measure through appropriate government regulation, the modern unbundled software industry was created. The 1975 founding of Microsoft by Bill Gates can be directly traced to this mandated constraint on IBM’s market dominance.
At almost the same time, starting in 1969, the US Defense Advanced Research Projects Agency (DARPA), in the midst of the cold war, funded a project to build a redundant communications infrastructure that could withstand a nuclear attack on its switching systems and continue to operate. Ironically, for an organization better known for strong “command and control” management, the modern internet that emerged from this project was endorsed by both academia and the military and, counter-intuitively, built in a relatively unstructured manner with completely open standards and operating culture. This was in stark contrast to the highly structured, and hence relatively inflexible, circuit switched telephony system of the day, managed by the monopoly “One Bell System”.
As a result of this, we’ve come to expect and rely on a software and internet ecosystem that is competitive, open and which, as a result, has grown explosively and discovered seemingly boundless new applications.
Mobile Regulation is a Very Different Story
With hindsight, it is ironic that modern mobile telephony was first commercially launched in the United States, with the first AMPS cell phone service in Chicago. However, it is notable that by the 1990’s Europe had regained the lead, partly through good regulation, especially in comparison to the US approach. Being a late entrant to the mobile revolution, regulators in Europe mandated the new GSM (Global System for Mobile) standard be used by all competing mobile operators. The United States, by contrast, under the tutelage of the Federal Communications Commission (FCC) carved the US into about 80 separate regions and didn’t mandate a single standard, ensuring market fragmentation.
As a result, the US mobile industry had to expend tremendous energy and capital to consolidate regional players simply to provide the national mobile service footprint customers demanded. And the competing GSM and CDMA standards (not to mention the persistence of legacy DAMPS) kept the markets fragmented in the US, and by extension also in Canada. As a result, simple things like interoperability of SMS between carriers arrived at least 5 years later in US and Canada than in Europe. Until very recently, North American mobile innovation has lagged much of the world, notably including many developing countries.
Furthermore, the lack of an open environment to develop mobile applications stifled the creation of the vibrant startup ecosystem that the software and web revolutions witnessed. Last year’s victory of “Open Access” provisions for the 700 MHz (the former analogue television broadcast) spectrum in the US, was a great example of forward thinking regulation by the FCC, albeit with much prodding by Google. Regulatory leadership is critical because the incumbent carriers, although they aspire to be more than “pipes” for data, have over the last decade made almost zero progress in building the mobile applications framework. And, it is even more important for mobile, because carriers are in effect stewards of the scarce radio spectrum upon which the mobile industry is built.
The GSM standard (and its 3G successors) is inherently open. Operators have tried to close the handset and interropability market through tactics like “SIM Locking” and exorbitant inter-carrier “roaming” charges. The European Union has, once again, taken leadership by crafting a regulatory framework that, in return for the right to use the public spectrum, levels the playing field by opening up each of these issues.
The Way Forward
Clearly, the US Federal Communications Commission is starting to recognize the importance of regulation in building an economically vital industry of the future. The Canadian Government and the Candian Radio-television and Telecommunications Commission (CRTC) need to show leadership in this area as well. The first step is understanding the issue. Greater engagement with experts and visionaries who represent the various industry and both business and consumer customers is vital to our future economic prosperity. Canada has the skills and ambition to be a major player in the new mobile internet revolution. Let’s ensure that government regulation is a competitive advantage and not the impediment to global leadership it is today.
This is great news for Verdexus portfolio company Iotum, which launched the premium service of Calliflowerb on the west coast at Under the Radar – Mobility a week ago. Check it out. Right now, when cash is king, the integrated features and disruptive pricing could save your company money on all those online meetings and conference calls.
29 Nov 2008
0 CommentsBusiness Models: Subscription vs. Freemium vs. Free in Lean Times
Have you invented a killer application that people will use in business or their personal lives on a regular basis? Are you ready to implement a great web/mobile experience in the context of building a web startup business?
1. Subscription: This model involves a per monthly charge for a service and generally uses traditional and web approaches to customer acquisition. A conservative approach, this is simply a Web 1.0 conversion of traditional selling models to the online world. That being said, many great businesses have thrived using this model, because in principle, cash flows can commence very quickly.
Web services like Basecamp from 37Signals or LinkeIn are successful examples of the Freemium model. Few people realize that LinkedIn, which most people see as a free service, generates over $100 million in revenues from people who chose a premium ofering, special services for the recruitment industry, and some ad revenues (that serve to subsidize the free offering). With an industry average Free to Premium conversion rate of 3%, the Freemium approach, if designed and executed well, can be quite lucrative.
Freemium can be a great way to lower the costs of customer acquisition, provided that the free piece isn’t too expensive to deliver. Well designed offerings which tap into viral social media and user generated content can generate significant customer pipeline to the free service at reasonable cost
No startup entrepreneur needs to be reminded of the challenges of financing during this current economic turmoil Notwithstanding that, as I pointed out in Counter-cyclical Optimism, it may be one of the best times to launch your great new innovation into the marketplace.
One of the key success factors, that we’ve long espoused as part of our Venture 2.0 approach, is to keep the cash burn lean. Now, we would add to that the requirement to race as fast as possible to cash flow positive. The approach of low cash plus high speed is not often the ideal way to dominate a market, but it can shave hundreds of thousands, or even millions, of dollars off the cost to build an online business, thereby reducing the current financing risk.
I would assert that this dynamic is forcing some difficult, and possibly counter-productive choices. It goes without saying that it will be much harder to finance purely Free startups in this climate. Well known Web 2.0 companies like Twitter and AideRSS both fall into the “hard to monetize” category. Although they could drive small amounts of ad revenue, that might well distract from the experience enough to annoy users. It may well be that such businesses simply need to “find a new home” as a plug-in to a larger company with a well established business model. Thus, if you plan to build a purely Free business, you need to plan to build for the lowest cost from zero to exit, to reflect the fact that exit valuations may be impaired over the next period. Furthermore, it is unclear, unless you have a rich sugar daddy, how you will fund the burn until the exit.
For those businesses that lend themselves to the model, Freemium would seem to be the ideal choice. There are some major questions such as:
Fundamentally, you must find a way to a to accelerate the drive to cash generating premium subscribers. It will almost certainly mean finding accelerators to the business model to drive your premium adoption while lowering the costs even further in your (already minimal) monthly burn.
Solve this, and as a startup, you have strategic options. You have potentially built a great cash flow positive business, but also increase your likelihood to beomce a strategic acquisition target for a more major web or mobile player. Crack the code, and It’s a great recipe for success.