Head of Internet Business Unit at IDATE
The Internet services industry is often perceived as a world of completely free services (and thus implicitly low quality), where everything is supported by advertising. In reality, the situation is obviously more complex. The majority of Internet services revenue comes from paid or transactional services, and the proportion of advertising revenue is trending downward (see Chapter 2, Internet markets) with the development of new services around mobile, cloud computing and even social networks, which rely more and more (at least partly) on paid solutions.
A low-cost approach to services?
Many services are actually offered in freemium versions, with a basic free version (often ad-supported) and a more premium paid version. Spotify and Deezer use this model for online music distribution, and Dropbox and similar services use the same for cloud computing. The goal is to establish a large user base by offering free services, and to then use this base as a lever to attract users to the paid services. The associated marketing costs are therefore next to nothing. The bestperforming players are managing to convert almost 15% of their user base to the paid versions.
Even paid services providers (including freemium models) are adopting low-cost pricing strategies, which breaks with traditional pricing models (like Skype for VoIP, Netflix for SVOD, Amazon for e-commerce and PayPal for payments) and thus undermines traditional service providers. However, this does not mean that Internet players never offer premium services.
Premium services still exist on the Web
Where monetisation and value creation of Internet services has seen the most success is when providers have used an approach that combines lower-cost pricing and premium services aimed at the end user and/or third parties (such as merchants, advertisers and developers). It is often the functionality offered to the user rather than the price that is premium, especially in terms of customer service (Amazon), scope of the service, account management and device support (Netflix), decision support, ease-of-use (PayPal). Most players also rely on a two-sided approach.
The service offered to third parties who connect with or capture data from users is premium. The price per unit for this is often moderate, too. But the service is very attractive for advertisers and merchants in such terms as quantity and quality of available data, ease of implementation, value-added services, targeting capacity. Advertisers are always willing to pay more for advertisements to reach the most attractive targets. The CPMs are therefore much higher on financial information sites. It is, then, ultimately data, and personal data in particular, that constitutes the premium resource of the Internet.
Premium services need advanced tools
To effectively implement premium services on the Internet (and consequently data management and processing), most players are investing heavily in infrastructure for both hardware and software. Major Internet players are positioning themselves around essential technological cornerstones, such as data centres, the Cloud, browsers, operating systems and even devices themselves, or specialized solutions such as DRM. They are implementing their own solutions and developing proprietary approaches if necessary, even offering their resources to third parties (such as Amazon Web Services, Google Analytics, Facebook Connect). Google invests almost one billion USD per quarter in infrastructure.
Advanced software solutions are also central to many Internet players’ activities, particularly around data processing and analysis, which is the focus of the recent growth of big data (see the Big data section in this chapter). Google is therefore indirectly behind the current reference service Hadoop, which derives from Google’s MapReduce.
Premium Internet services involve platform development
Premium services also require vast amounts of data to be collected. This data capture can be direct (via user tracking),declarative or from various sensors. It can also come from third parties through agreements (possibly via their API).
This has pushed most of the major players to develop platforms capable of collecting data from third-party services. This platform links users of the Internet player’s service with developers, merchants and advertisers who want to connect with a wide audience, with varying levels of targeting. It is therefore an essential intermediary tool. To increase interest in their platform, the major Internet players are also keen to offer a part of their infrastructure and devices (Nexus, Kindle Fire) at low costs, despite their relatively premium specifications.
About the Digiworld Yearbook
While digitisation will bring more growth to certain developed markets, the next decade will show a marked decline in linear television revenue in the video sector, and a corresponding increase in new on-demand services. For the incumbent audiovisual operators, their capacity to generate revenue from these new services will dictate whether they can sustain their levels of turnover. They will, for all that, only find growth opportunities in emerging markets.
197 pages that deliver the finest market insights from IDATE experts who track the changes at work in the globe’s telecom, Internet and media industries throughout the year.
the DigiWorld Yearbook is published in English and French and available in print and PDF format. An iPad edition, developed by Forecomm, is also available.
The 2012 edition can be downloaded for free
The 2013 edition is available for purchase. Print: €99.99, incl. VAT; PDF and iPad: €54.99, incl. VAT
- You can have a look at the digiworld yearbook 2013, purchase it or even download the 2012 version for free at : www.digiworld.org/yearbook/