This week: reducing the reliance on ad revenue, reducing the reliance on external partners: how big tech companies evolve their business models.
Sandra Peter (Sydney Business Insights) and Kai Riemer (Digital Disruption Research Group) meet once a week to put their own spin on news that is impacting the future of business in The Future, This Week.
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Kai So what are we talking about?
Sandra Buses. I think we should talk about buses, because Shenzhen just turned all its 16,000 buses fully electric. Electric buses is something we have been quite fascinated by for a while now, because a lot of the conversation around the electric vehicles has always been around Tesla, but buses are way more interesting. Remember when we did this story about two and a half years ago?
Kai Um, about BYD, Build Your Dream, the Chinese company that leads the charge in electric vehicles, really, just on the sheer size of the fleet that they're creating?
Sandra Exactly. And they make about 99% of the world's electric buses. And Shenzhen moving completely to electric buses is a big deal because these electric buses are a lot quieter than normal buses. And they produce far less carbon dioxide and fewer pollutants than normal buses.
Kai So they emit 48% less carbon dioxide, and they're also cheaper. So it's really a win, win, win, they're better noise, lower carbon, and they're are also some $15,000 cheaper in maintaining the buses because the engines are far less complicated and maintenance intensive.
Sandra And we'll put the link in the shownotes to our big story around electric buses that we did a while back, because it really shows how China has been leading the way in this for a few years now. And even back then, two and a half years ago, they were leading the world in electric buses. They had thousands more than the UK and Germany combined, which were the second largest adopters of electric buses at that point, by as much as 600 times.
Kai And interestingly, just this week, the New South Wales Government announced that it is planning to replace all its 8000 buses with electric buses by 2030. So in terms of what is concretely being done, there's going to be 50 buses to be rolled out next year across Sydney. But the aim is really to use public transport to make a big difference to the carbon emissions of the state.
Sandra So maybe not buses quite yet. But this is a story to keep an eye on because electric bus numbers are rising across the world. And interestingly in areas where you wouldn't think this would be a big issue, so across South America, like Chile has the largest fleet now of electric buses outside of China, but Australia as you mentioned, the US are also moving towards electric public bus fleets in their bigger cities. Pune became in India the first city to adopt electric buses. But everywhere the adoption of these electric buses brings on huge challenges to do with infrastructure, places to charge these buses that need to be refuelled every 200 kilometres. These stations are expensive, so there are large investments that the cities have to make in adopting these fleets.
Kai And for New South Wales it comes at an interesting time that the announcement about an electric bus fleet is made when the government is also contemplating a new tax on electric vehicles to make up for fuel excise, which we mentioned just the other week. So some inconsistencies around how the government plans to transition the state to an electric future.
Sandra But this wasn't the only story that's cropped up over the last week that we have addressed before. Another one was around cultured meat, with big news this time in that Singapore has approved cultured meat for consumers for the first time.
Kai And just as a reminder, when we say 'cultured', we mean lab grown meat that does not involve any animals other than the original cells that are being used.
Sandra We've spent quite a lot of time here talking about Beyond Meat and Impossible Foods, and we'll include the articles in the shownotes, including an episode we did this season around the acceptance of such alternatives to meat. But in Singapore now you can go to a restaurant and eat chicken that has been grown in a bioreactor. So this has been a landmark moment in Singapore as Just, which is a San Francisco-based startup, is now allowed to sell cultured chicken to the public for the first time, and Beyond, Just, as of course big investors like Memphis Meats or Tyson Foods that we have discussed previously, that currently dominate the meat market and are trying to move into meat alternatives including now cultured meat.
Kai So fake meats. Speaking of fake things, I have another story that is interesting, maybe not quite ready for primetime. But apparently Frank Sinatra is now covering Britney Spears songs, or so it sounds, because a artists duo that uses machine learning algorithms to train the algorithm on voices of famous singers, has produced the song Toxic by Britney Spears, sung in what's been called 'bizarre approximation' of Frank Sinatra's voice. The problem with this song, however, was that it was promptly taken down by YouTube for copyright infringement.
Sandra So whose rights are being infringed by whom? Is digital human Frank Sinatra upset about this? Is it Britney Spears? Is it the record company?
Kai That is a good question which hasn't really sufficiently been answered. Apparently, the complaint was issued by an anti-piracy firm called GrayZone, Inc. which has refused to comment for the Futurism article. But the company works on behalf of artists. But it seems that the company works proactively and uses itself a machine learning algorithm that scouts YouTube to then issue automated infringement notices. So this is music by a bot being taken down by a bot. But the artists enlisted lawyers to try and fight this because there's a lot of things that are now up in the air, because the song should have been allowed up under fair use. They're not monetizing the song. So they should be able to create a cover of Britney Spears a song. So this raises questions now as to the legal status. What is infringing what here. Unfortunately, this has not gone to a public court, but it happened entirely within YouTube's complaint process. So it remains to be seen what legal precedent will be, but it raises all kinds of new questions around copyright and, you know, an artificially produced voice approximates an artist.
Sandra To be honest, we're just not doing this because we can't play a clip of the robo-Frank Sinatra playing Britney Spears's Toxic.
Kai No, because we don't want to be taken down by the robolawyers as well.
Sandra Speaking of things being taken down, there was huge space news this week in that China's mission successfully landed on the moon and is bringing back lunar materials, bringing back rocks to Earth.
Kai Something humanity hasn't done since the 1970s, I believe.
Sandra Yeah, it's only the US and the Soviet Union that have ever successfully brought back lunar material to Earth. And the last time this was done successfully was 44 years ago.
Kai But it was also Black Friday and Cyber Monday and the world went on a shopping spree.
Sandra And so did big tech, both our news streams got flooded with Black Friday and Cyber Monday deals and sales for everything and everyone, but big tech also went on a shopping spree. And there have been a lot of stories there.
Kai It was on the one hand, companies such as Facebook and Salesforce big acquisitions of companies that they added to their service portfolio.
Sandra And when we mean big, we mean big. Salesforce paid 27.7 billion for Slack.
Kai But it was also Amazon, making acquisitions of a different kind, hiring over 400,000 people in the last nine months, that amounts to about 2800 new employees per day, to cope with a 39% increase in eCommerce demand on the back of the COVID crisis and the move to online shopping. So a huge increase that they have to absorb that, of course is compounded in the US by promises to make overnight delivery, or same day delivery really, in most regions across the country.
Sandra And so we thought we'd do one of those episodes that focuses on the not very sexy, not very talked about a lot, strategy moves. So often when we talk about big tech, we tend to focus on the big innovations, the big disruption, the big sexy moves, new iPad, new services, new markets...
Kai Or the fallout from their business models in society, like we did in the episode when we discussed The Social Dilemma, the movie. But today we wanted to take a look at big tech, at Facebook, Google, but also Apple, who made big announcements and see how they evolve their business models at a time where a lot of their traditional market segments might approach saturation.
Sandra So let's do that.
Intro From The University of Sydney Business School, this is Sydney Business Insights, an initiative that explores the future of business. And this is The Future This Week where Sandra Peter and Kai Riemer sit down every week to rethink and unlearn trends and technology and business. They discuss the news of the week, question the obvious and explore the weird and the wonderful.
Kai So this story today comes from Inc. It is titled "Why Facebook Is Spending $1 Billion on a Company You've Never Heard Of".
Sandra This week, Facebook announced that it would spend about a billion dollars to buy a company called Kustomer, that's Kustomer with a K, a rather unfortunate name, but also a much better deal than Salesforce got on buying Slack for $27.7 billion. Kustomer with the K is a customer relationship management system that uses machine learning to help businesses, and in particular, small businesses, manage the way they interact with their customers. That mostly means that they look at the way they talk to them on social media, on email, on chat messages, on websites using chatbots, and so on, and try to consolidate those conversations in one system to help businesses engage their customers.
Kai So that could mean that the customer contacts the company or they engage with an ad and then look at something on the website, then talk to a sales bot or a sales agent on a platform such as WhatsApp, and Kustomer, the platform can then track those engagements all the way through to closing a deal, then offering analytics off the back of that where a company can see what channels successful deals are coming from, and then optimise how they use their sales agents and their activities across those various channels. And what is unique about what Kustomer offers is that its algorithms read the conversations that are done in natural language and can then allocate those to the customer, to the deal, so it requires very little overhead work on behalf of the sales agents in tracking those activities.
Sandra So why are we talking about this today, because Kustomer was not a huge acquisition for Facebook? It's a seemingly boring company that does customer support. And usually the news around such acquisitions stops at the, 'Oh, and by the way, Facebook bought another company.'
Kai So the story becomes interesting when read against some of the other news of the week that involve other big tech companies that we're going to come to. And once you think about what Facebook might actually do with it, what are the opportunities that open up for Facebook in evolving its business model that is almost entirely driven by advertising, Facebook makes more than 99% of its revenue from advertising. And so the aim of big tech companies to evolve their business models, in case of Facebook into new areas, and into new ways to monetize activity on its platforms.
Sandra At first, the move to acquire Kustomer could be interpreted as just a way for Facebook to shore up the services that they offer small businesses. Facebook has for a long while been a platform for small businesses to reach their audiences and reach their customers. So this could be seen as an additional way in which they're trying to support those small businesses, and a way to attract more small business to their platform.
Kai Many businesses don't actually have a website anymore these days. They have a so-called 'Facebook business page', and they advertise on Facebook, they might communicate on Facebook. And so for Facebook, it might be a way to help these businesses manage their transactions on the Facebook platform end to end. Which really, if you think about this in the orthodox way, in terms of what Facebook does, advertising would then be seen as a move to get better visibility through Kustomer about what users do and how they are tracked through a transaction, from an initial viewing of an advertisement, communications, and then potentially closing a deal. And that's really important for Facebook in a way because it would give them information that they not necessarily have access to at the moment, which is, how successful are these ads actually in closing a deal? So they would gain data visibility of the actual transactions that businesses would support with Kustomer on their platform.
Sandra This would still be within the framework of an ad-supported business model.
Kai So that would mean that they would give away Kustomer, the functionality, for free, incorporated into their current business activities, and then monetize it and recoup the investment in Kustomer through better targeted advertising.
Sandra But there is another part of their business in which Facebook could use something like Kustomer which actually would be an evolution of their business model. And that is through their WhatsApp platform.
Kai So Facebook hasn't really found a way to monetize WhatsApp, it's not being used for advertising like Instagram and the Facebook platform is, and so this might be a way to make what's at the centre of customer engagement and the centre of business activities, by wrapping the customer CRM process around WhatsApp and make it a platform for interactive, conversational retail and business activity.
Sandra So just to remind our listeners, WhatsApp is a chat platform that is currently free and not supported by advertising. There are about 2 billion people across the world that use WhatsApp to text or make phone calls. But it generates almost no money for Facebook at the moment, unlike their other platforms, Facebook and Instagram, which are both monetized. And it's also important to remind people that both Facebook and Instagram started as a space that was not monetized, where people found a useful place to engage either with their family and friends or with people with similar interests. And then Facebook found ways to introduce businesses to the platform and monetize them through advertising. And that has happened to Facebook almost 10 years ago. And they have done the same thing to Instagram where businesses can now place ads, and that brings in significant amounts of money to Facebook. However, they haven't managed to do that with WhatsApp. But there is a clue in the ways they're considering monetizing WhatsApp through their experimenting with sales on WhatsApp in India.
Kai So you're referring to the collaboration with Jio in India, where Facebook is piloting some sort of e-commerce platform on WhatsApp, right?
Sandra Indeed, Jio is India's most valued company, most valued tech firm, and Facebook partnered with Jio to test an ordering system on WhatsApp. And the idea was that users in three suburban areas of Mumbai could use JioMart's WhatsApp business account for grocery shopping. So they could initiate an order through texting, which would prompt a mini store to open in their browser and they could pick grocery products and you know, tea, coffee, snacks, oil, rice, and then place this order via WhatsApp. Now currently, there was no way to pay digitally, but Jio would then assign a physical store where you would go but you would get your invoice and you would place your order through WhatsApp.
Kai And so it's quite conceivable that Facebook might utilise Kustomer to create a similar transactional experience that revolves around conversations in WhatsApp, and that that would be monetized by taking a small cut out of each transaction. So that would be more akin to an eBay model where the income the platform derives is a percentage of the sales price, for example. And so that would present for Facebook a new kind of income stream that does not rely on data exploitation and advertisements.
Sandra And let's remember how widespread WhatsApp is as a communication platform. It's the default communication platform in places like India, but it's also very widely used in places like Europe.
Kai So in terms of Facebook's business model, this can be seen as an evolution away from the sole reliance on ad revenue, introducing new revenue sources, but also in a bigger picture positioning itself more into the Enterprise Solutions market. As a reminder, Facebook already built Workplace for Facebook, which is a tool with which companies can use Facebook-like features for internal communication akin to Yammer, or indeed services like Slack, which we mentioned.
Sandra Which is now, of course, part of Salesforce.
Kai Which is also a customer relationship management solution.
Sandra So seen this way, this might be a move that is more akin to Salesforce buying Slack, in making Facebook more attractive to business users.
Kai And so at this stage, we could argue that Facebook would go after a different segment, more the small and medium-sized companies, but by adding Kustomer, offering more business services, offering Workplace for Facebook, where our sales agents could, for example, communicate among themselves, then use Kustomer in the Facebook platform and WhatsApp to organise the interactions with customers. They would create a portfolio that resembles what Salesforce is doing with the integration of Slack, again, Slack being a tool for the internal communication among people, the Salesforce platform interacting with clients externally, and would incidentally also move them closer to a company like Microsoft, which offers similar functionality with its Teams platform and Dynamics 365, their own customer relationship solution. So it would give Facebook options to potentially grow into areas and compete in areas of the market that they're not currently positioned in.
Sandra And of course, this move towards evolving the business model in a way that would take them away from such a strong reliance on ad revenue could also be seen as a pre-emptive move, given that the business model that big tech companies, including companies like Google and Facebook, have is under increased and intense scrutiny, not only at home in the US where they've been part of Congress hearings for the last couple of years, but also increasingly in Europe, which is due to make pronouncements around their perceived anti-competitive behaviour in the next couple of weeks.
Kai And not only that, also concerns around privacy and data exploitation. And so Facebook has every reason to find ways to monetize, other than through user data and targeted advertising.
Sandra So interestingly, the same shift in business model has occurred that other companies as well. And indeed, Google is far ahead of Facebook in shifting its business model away from advertising. As we know, Google used to also be almost fully reliant on advertising revenue, and they've managed to decrease that reliance significantly over the last few years.
Kai We mentioned last week, Google starting to charge for cloud storage for its Google Photos service. And we're putting an article from Fast Company in the shownotes, that makes the point that this is part of a move away from ad-reliance. Google has reduced its share of advertising revenue from 90% in 2015, to just 80% over the first nine months of 2020. So a significant shift that they have achieved through acquiring hardware businesses such as Nest, but also through monetizing subscriptions on YouTube TV, Google's Enterprise business, cloud computing services, and more and more business class productivity tools where they've bundled up some of their Google Workplace tools to now make them enterprise subscription services.
Sandra So last week's announcement around a subscription service for both their photo management tool, but also for their photo editing app is just an additional move in that direction.
Kai And that, of course, comes on top of other businesses also trying to diversify. And we want to go to Apple here, which has also over the past few years created more and more subscription services and have just recently launched its Apple One service ,which bundles up its cloud storage, its music service, its games platform, as well as Apple TV, in one integrated subscription in the hope of further decreasing reliance on its increasingly saturated hardware business, diversifying its business model.
Sandra But there's also another interesting announcement in the way Apple is evolving in its business model. And both Amazon and Apple have signalled this month a move away from Intel's chips. Apple will now make its own chips for Macs as well, not only for iPhones and iPads. And just this week, Amazon has also joined the list of companies that are using homegrown chips through ARM, a British company, rather than buying chips from Intel.
Kai And we could spend time on why this is not great news for Intel, which would also involve discussing that ARM is owned by Nvidia who dominate the bespoke chip market for AI and machine learning solutions. But what we really want to focus on is why Apple is further strengthening its stronghold on developing and creating and owning all the tech in its hardware/software ecosystem.
Sandra So for this it's worth going back to why Apple started developing their own chips in the first place, because this was not Apple's intention back when they started making iPhones.
Kai No, Steve Jobs famously went to Intel at the time and ask if Intel could create a lower performing but low-energy chip for a new product category which was the newly to be developed iPhone, and Intel at the time passed because they didn't want to develop to the specifications of Apple, they were dominating the market for chips and they basically said, 'it's our way, or no way', which forced Apple to look for alternatives and ultimately, they went to ARM and started developing their own chip designs which amounted in the launching of its mobile chips, the A1 as the first one which continuously evolved, became more powerful, were integrated into iPad, became more computing-like, and now cumulated in the launch of the M1 chip, which will replace Intel chips in its laptops and desktop computers.
Sandra And it's easy to see why this might turn out to be a good move for consumers, in that both Apple and Amazon that's using their own chips in their cloud computing business, are making the case that this is both faster and cheaper by about 20%, compared to the Intel-based chips, but it's actually providing a much bigger benefit to the two companies themselves.
Kai So for Apple, you could argue that the hardware market might be slowing down, so producing your own chips gives you a cost benefit, therefore maintaining margins, but what Apple is really trying to do is owning all the parts, hardware and software, in the technologies that they produce, which allows them to do things that they wouldn't otherwise be able to do. So the M1 chip is an integrated chip that integrates many components that were usually on separate chips, that allows Apple to basically bake software into the chip and therefore create an integrated experience that they're already doing on the iPhone and iPad platforms, also on the computing platform.
Sandra And this can really make for a seamless experience for those using many of the Apple devices. So say you have an iPhone, and an iPad and a MacBook. Now all of your applications and all of your interactions will not only be the same on all devices but will seamlessly move from one device to the other, as they all use the same infrastructure.
Kai And so your Apple computer will now be able to run an iPad app. And there have been rumours for a long time that Apple wants to blend the operating systems across those platforms and getting rid of Intel out of its ecosystem will actually facilitate that move. So it's really a move that will put Apple in a position where they can innovate across the entire hardware and software landscape that they have, without having to wait for Intel to provide them with the right chips.
Sandra So what we wanted to do today is look at that part of big tech strategy that's not really talked about. Many of these moves are behind the scenes moves that play out over many, many years that are long-term investments in how big tech evolve their business strategy. And in that respect, they're not the sexy moves that usually get analysed, but they're the ones that long-term make significant changes to how these companies operate and how they make their profits.
Kai So we might be seeing the beginnings of a move away of Facebook and Google from the sole reliance on the ad business. We're seeing the last final moves of Apple moving away from the reliance on external companies, and we're seeing Apple's moves to move away from the reliance on their hardware business alone ,through creation of more and more services.
Sandra And that's where we want to leave it today.
Kai These stories are surely to come back as they extend into the future. Thank you for listening.
Sandra Thanks for listening.
Outro This was The Future, This Week, an initiative of The University of Sydney Business School. Sandra Peter is the Director of Sydney Business Insights, and Kai Riemer is Professor of Information Technology and Organisation. Connect with us on LinkedIn, Twitter and Flipboard and subscribe, like or leave us a rating wherever you get your podcasts. If you have any weird and wonderful topics for us to discuss, send them to email@example.com.
Kai Do you want to chime in or do I keep going? No?
Sandra Hang on, I had something. Something, something, um. Say something. Anything.
Kai So a real moonshot project. No.
Sandra and Kai When the bot hits your eye...