The Facebook WhatsApp acquisition is a good example of why a young new technology business needs to consider how it can evolve and partner with an older more established company – in this case, one of the most recognised brands in the world today.
By acquiring WhatsApp for $19 billion, or 10 per cent of its total market value, Facebook will be attracting a younger audience to its existing customer base.
WhatsApp boasts 200 million active monthly users, and although it is at the moment a free service, there are possible ways of making it pay as the service rolls out over time.
It is a really interesting acquisition. The Facebook business model is different to the business models that many traditional firms have had, in the sense that it generates its money like Google does from advertising. For Facebook to deliver on its promises to its advertisers it needs a high volume of users. It needs to continue to attract users and it has to be very in tune with the latest developments in the way that people are using these new technology services and we know that WhatsApp is in tune with a younger customer base.
In recent years we know that Facebook has been very good at making acquisitions that bring it closer to new users in order to keep its existing users engaged. WhatsApp – effectively a free texting service – has become incredibly popular among children and teenagers and so, by buying WhatsApp, Facebook is making sure that those children and teenagers stay connected to Facebook. This deal makes a lot of sense as it allows Facebook to keep its user community and therefore it remains valuable to those wanting to advertise with it.
WhatsApp is a strong player in emerging markets across Asia and the Middle East, so it also offers Facebook a new way of getting to markets and expanding its global reach.
The other thing that is interesting is that while business models have focused on the concept of co-creation in the service sector - how you jointly create value with your customers - what this take-overs shows is the importance of thinking about evolving services jointly.
In the future new technology startups and established companies will need to understand how they can evolve a service partnering by with others. They will need to find the right business model that goes with it to best meet the needs of the market.
When people start to use your service in a different way you need to be ready, and you have to recognise what it is that your customers are doing differently and change your business model to match and support them.
So watch out – if you don’t get that right you find your business becomes redundant and someone else will take its place. One company that has responded well to these modern challenges by evolving its business model is TripAdvisor; it has made itself more and more useful for the users of its services.
Adopting an Ecosystems approach
The Ecosystems approach that we adopt at the Cambridge Service Alliance, points to a number of different options for companies who want to partner with others. You need to ask the question: ‘How do we collaborate with, rather than buy the players in the Ecosystem?’
You need to ask: ‘Which of the players in our marketplace do we want to own, and can afford to own, and which are the ones we might decide to collaborate with, rather than compete with?’
When you are thinking about the ecosystem it is really those questions of: ‘Where and who do we choose to cooperate with and which of the assets do we really need to own?’ that need to be answered.
You also have to ask: ‘If we do acquire another business does owning that business allow us to capture the value that we paid for it?’ If you do not need to own a new business, but want to work and partner with it in some way, you might want to encourage others to work in that particular segment of the market too to find out what potential it really has.
How to value a new startup
The question of valuation of technology companies is a combination of art and science. At one level you are looking at what are the future cash flows, and what potential does this business have? But you also need to consider if there is some element of delivery required as well.
When you first see a start-up or a technology firm often the valuation is based more around the potential it has in the future than what it does now, so you have to ask what could this organisation do once it has evolved further down the line?
However, as time goes by the firm has also got to demonstrate that it can convert that potential into actual delivery and as the firm gets older and more mature, there will be greater expectations around its actual ability to deliver the results rather than the promise of what might come in the future.
Facebook is an interesting example because when it first floated it had massive potential, so in some ways its initial valuation of $38 per share exceeded what it could actually deliver and the expectations surrounding that share offering were unrealistic. But you have to be in for the long haul, and let these ups and downs play out. Facebook has demonstrated that it can deliver on some of its promises and its valuation has subsequently gone back up.
Deciding on your business model
If WhatsApp isn’t charging for its service how can it evolve its business model and generate profits in the future? Not charging may be a good option for WhatsApp; instead it may want to sell its ability to connect with its users so it is in fact generating a marketing model of sorts.
What it is doing is collecting lots of people, its users, which the marketers can then access through using the Facebook channel. The marketers are paying for the eyeballs, and the user effectively gives their eyeballs for free in return for the use of the service. Going forward you could devise a business model where you give a certain number of messages free and then you charge once your users gets beyond a certain volume of messages.
It is tricky to decide when to start charging. When you have given away something for free, particularly in services, it may be difficult to convince people later to pay for that service, so it is quite a difficult transition to make.
There are examples of where some organisations have done that, with Skype being one. Skype is still free for internet calls, but they introduced Skypeout where you can call from a Skype number to a landline number, and you pay for that service.
You have to think really carefully about how you are going to monetise the service and which dimensions people will be willing to pay for and which they will still expect to be delivered free of charge. It may well be that a new technology start-up will have to give some of its services away for free and continue to do so for some time, before people will actually pay for extra bits of that service.
Why evolving your service matters
The evolution word is really important one. That is why I have talked about the idea of co-evolving a business model when you first start out. A really good example of a co-evolved model is Ebay – it started out selling second hand items, originally around antiques, but over the years it has itself become a market place where people can run online stalls.
Ebay has recognised the way its users want to use the platform it provides and it has evolved its business model to support its users, and in doing so it has become more successful. In the data and start-ups world you do have to be flexible and nimble enough to co-evolve your business model as the market and as your users change.
Creating jobs in modern manufacturing and wealth creation
New technology businesses are creating some fascinating jobs and some really interesting new opportunities for people. If you think about a modern manufacturing context, many people have a view of manufacturing as an old smoke stacked factory but that is actually a million miles away from where manufacturing is today.
There is a lot more use of data and analytics in modern technology processes and companies. People are remotely monitoring what products are doing while they are being operated. The capability is there to remotely diagnose what might be going wrong with your car or other equipment you regularly use.
Putting that monitoring infrastructure and technology in place is a really interesting career opportunity for people both around the physical hardware and around actually analysing and using the data too.
In the UK the productivity gap with the US was actually closed for some years, but recently it started to increase again. There has been a lack of investment in R & D, and a lack of investment in skills, we need to recognise that we have to train people in the use of new technologies and innovations.
If we get these things right then we can start to produce some quite interesting and innovative business models. The reality is that you can generate very good wealth creation, whether you are creating tangible goods or whether you are providing pure services or services supporting those tangible goods.
There is a big change in the world today, a lot of it around the question of data and analytics, so people talk about the internet of things - the way sensors are collecting massive amounts of data - but this will allow us to come up with new ways of optimising the products and indeed the services that our companies deliver.
More jobs for women and those with empathy
Today’s modern engineering jobs are more knowledge based and they are more involved in analysis and in data and analytics and so on. This has changed the nature of the engineering roles traditionally found in manufacturing companies, and so they are appealing to a wider section of society, including women.
People who may have once gone into software or computing roles might realise there are some interesting jobs in manufacturing. It is becoming a much more appealing profession to a wider group of people.
For some of these new jobs you may need maths and science, but for some of them, you may well need great customer experience and the ability to interact with people. The skill of empathy, for example, may be needed, because you are interacting with one of your customers and explaining to them what the data has told you in terms of how that particular product might be going wrong.
Watching the startups of the future
In the future I think we will see an ongoing set of mergers and acquisitions particularly as technologies develop and grow. I think one of the areas that we will see quite a lot of activity in is all around this question of data and how we use data. Those firms that will do well will be able to harvest or collect data. Companies will need to be able to interpret and then make sense of that data, and they will need to provide the tools, whether it is the hardware or the software, to allow both the gathering or harvesting of data and the analysis of data. Those sets of firms will need to come together.
There are some large organisations out there wanting to do business with the new startups. GE is a good example, where it is making some quite careful acquisitions to build its capability to really capitalise on the internet of things. There are quite a lot of small start-up firms that are doing quite interesting things in that area that will clearly be targets in the short to medium term for some of the larger firms as well.
Whether you are starting-up or focusing on maintaining your existing customer base you will need to increase your reach and recognise the way that your user community is evolving its needs. You will have to evolve your business model and your capabilities to really match quite rapid changes in what your customers are demanding and expecting. This means that your rivals may well want to make friends with you.
• Professor Andy Neely is director of the Cambridge Service Alliance, a leading partnership between global business and academics focused on understanding and developing complex service solutions.