By: Sujal Shah
In 2011, the top 5 publicly traded companies in USA by market cap were: GE, Microsoft, Exxon, Citi, and Walmart. In just 5 years – by 2016, the top 5 companies were: Apple, Alphabet, Microsoft, Amazon, and Facebook. The major differentiator for these five companies is that they are using technologies to come up with new business models that change the shape of the industry.
Originally, most companies were working on business models based on “supply side economies”, wherein they specialize in product manufacturing (car, computer, shoe or any product), find out how efficiently they can make those products and how best those products can be sent to customers. Companies made more profit by having efficient supply chains, distribution channels and so on. Products were sold by ’pushing’ them and many of us remember sales targets, targets for distributors, retailers given foreign tours if they achieve sales targets, and so on.
In this scenario, what were the changes made by Apple or any of the other 4 technology companies listed above? At one point of time, Apple was also in the “supply side economy” business. In the 1990s, it was selling Macintosh as a product. However, Microsoft gained dominance and Apple was struggling to retain its share in the market, to the extent that, in 1997, Michael Dell said “Apple should shut down and return money to shareholders”. From that dire stage, today Apple is a company with top market capitalization and its cash reserve is more than the GDP of certain smaller countries. What exactly has changed?
The quick answer for Apple was the iPod and then the success of the iPhone. However, it is not just the iPod or the iPhone that has shaped this success. It is the same for Alphabet, Amazon and even Microsoft.
It is the “platform” approach, adopted by these companies, that is getting them success at speed.
App Store is Apple’s platform, while Google is using maps and Play Store as platforms. These platforms create a network effect and give rise to the ‘demand side economy’. Considering the popular maps app on phones, the accuracy of traffic predictions will increase when more people start using them, and, with increased accuracy, even more people will join the user base. Because there are more people using it, companies would advertise on it and it continues that way. This is a pull effect. Many a times, it is also called the network effect.
Network effects are so dramatic that companies can be seen giving goods or services for free, or at very discounted values, to scale up network effects. For example, most of the ride hailing apps offered rides at very low rates initially, aiming to invite as many people as possible to their own platform to generate the network effectexplained above. They also gave incentives to drivers so that both the riders and drivers join the platform and generate network effect.
In supply side economies – for example, in the case of any car manufacturer, the value gets generated inside the organization (manufacturing and selling cars).While, for demand side economies, value is generated outside of the organization, by networks. (For example, a ride hailing company generates value by having drivers and customers – the ride that this company ‘sells’ is outside of organization of the app company.)
Similarly, consider companies owning Operating Systems (OS) for mobile phones. If more mobile handsets are sold using a particular OS, more app developers will prefer to develop apps on that OS. Now, since more apps are available on OS, more people will be attracted to use a phone with that OS, creating a network effect. The app is developed by a developer outside the OS company (i.e. value is created outside of OS company), the company provides a platform to publish and buy apps and, accordingly, the OS company benefits from the app sale.
Demand side economy lead companies (Apple, Microsoft, Alphabet, Facebook, Uber, Airbnb and so on) depend on the following technologies-
- Cloud computing (It is the on-demand availability of computer system resources, especially data storage and computing power, without direct active management by the user.)
- The Internet of Things or IoT(It describes the network of physical objects—“things”—that are embedded with sensors, software, and other technologies for the purpose of connecting and exchanging data with other devices and systems over the Internet.)
- Data &Analytics(It is a process of inspecting, cleansing, transforming and modeling data with the goal of discovering useful information, informing conclusions and supporting decision-making.)
- Artificial intelligence (It is an intelligence demonstrated by machines, unlike the natural intelligence displayed by humans and animals.)
For example, for the ride hailing app platforms, the handsets of the driver and customer are working as edge IoT devices. This device (phone using the ride hailing app) can connect to the cloud services platform of the app company, which matches the driver and customer, generating optimum route and billing. It is the device data that enables this flow to work. The hyper connected world leveraged by the platforms is the way of the present, and the future.
(The author is Director – Software Organization, Barco India and the views expressed in this article are his own)
Very Well explained… Multifold benefits from Digital IOT can be exploited in any area we can think of. Good that Pan ndia is realising quickly, one of the few positives out of pandemic era.