I have been thinking of this since I attended the LTE world summit in Amsterdam.
The two sided business model has been used by many in the industry, especially @Telco2, to point to a potential gold mine for Operators by comparing to the Web.
While the concept has been popularised recently by Telco2, the two sided business model is a generic idea in macro-economics and in this post, I am going to consider the two sided business model from first principles.
I believe that it is wishful thinking to consider that the two sided business model applies to Telecom Operators.
Two-sided markets , also called two-sided networks, are economic platforms having two distinct user groups that provide each other with network benefits. Credit cards are one such example: Consumers prefer credit cards honoured by more merchants and merchants prefer cards carried by more consumers.
When applied to Telecom Operators, the two sided business model is perceived to have two sets of customers: The downstream customers (millions of consumers) and the smaller set of ‘upstream’ customers – specifically verticals such as healthcare, retail, media etc
However, when we look back at the definition of the Two sided business model, the Operative word is to ‘gain network effects’ i.e. the platform, in this case, the Operator, is supposed to facilitate network effects on both sides
The reason I question the feasibility of the two sided to Telecom Operators is: I do not see how the Operator provides network effects on either side.
A classic example of network effects is the fax machine or the telephone. The more people own a fax machine or a telephone, the more valuable it is to each owner. In other words, every subsequent user adds value to the whole system.
Do we really believe that subsequent users of the Telco platform add value to all other users of the platform?
Now, consider the ‘other’ side.
When considering network effects(fax machine concepts) to two sided business models, the members of each group exhibit a preference regarding the number of users in the other group (cross-side network effects). If firms account for the fact that adoption on one side of the network drives adoption on the other side, they can do better.
We are not seeing any examples of such behaviour (cross side network effects) when the Telecom Operator is a platform
So, not only is the Telecom Operator platform not demonstrating scale (on it’s own side of the platform) but nor is it demonstrating cross side network effects on the ‘other side’.
Let’s consider a concrete example: Network APIs (when applied to Operators)
Yes, network APIs have value to the customer but they do not provide network effects.
Contrast this to Apple and it’s developer ecosystem
Here, we do see a two sided business model ..
By many standards, that ecosystem is also ‘closed’ (ex approval of apps) but, critically, it DOES achieve scale on both sides of the platform (In this case, developers and consumers).
In contrast, the Operator as a platform is (relatively) closed, fragmented and not globally interconnected. The Telco platform is confined in most parts to one country or a group of countries where the customers are not necessarily constrained to using the Telco app (ex they could get the same service from an app from the device maker or from downloading the app from the web on to their phone). The same applies to all such ‘upstream’ customers – ex Retail, health care etc etc in relation to the Operator.
The fallacy lies in applying the ideas of the two sided business model to the Network Operator just because ‘Google / Facebook etc are doing it’. .
Ironically, the Apple developer ecosystem succeeds even when it is closed precisely because it manages to use the principles of the two sided business model to create network effects
Because all markets involve transactions between two (or more) parties and therefore are potential two-sided markets, it is useful to circumscribe the scope of two-sided-markets theory.
The first objective of the paper has been to propose such a definition: A market is two-sided if the platform can affect the volume of transactions by charging more to one side of the market and reducing the price paid by the other side by an equal amount; in other words, the price structure matters, and platforms must design it so as to bring both sides on board.
Jean-Charles Rochet and Jean Tirole ‘s formal mathematical analysis makes a lot of sense to me because it takes network effects into account and in that context, I cannot see how these ideas apply to Telecom Operators.
The idea of a two sided business model is intertwined with the idea of creating network effects.
The two concepts (two-sided business models and network-effects) cannot be separated.
Hence, the two sided business model does not apply to telecoms because there is no evidence that the Operator platform can nurture scale on both sides of the platform (cross-side network effects)