The document discusses case studies of companies that have successfully implemented two-sided market business models, including Google. It analyzes how Google has achieved scale and cost leadership in search and advertising by making products free and advertising cheaper. However, Google faces obstacles in areas like voice, messaging and payments where telecom operators have stronger capabilities. The document also examines Google's strategy of acquisitions and collecting user data to address these weaknesses and learn more about customers.

1. The 2-SIDED TELECOMS MARKET OPPORTUNITY Realising Growth from the ‘Platform Play’ Chris Barraclough Keith McMahon March 2008

2. Telco 2.0™: New Business Models in Telecoms, Media and Technology www.telco2.net

3. STL Partners Telco 2.0™ Consulting www.stlpartners.com Education & Training Strategy Development New Proposition Development Business Case Development Project Management Support Frontline GTM support STL’s ‘ Mindshare’ tools and techniques for value innovation Industry developments – Telco 2.0 New: Technologies Competitors Products Markets Business Models Strategy & Marketing implications Market Analysis Customer Analysis (VOC) Competitors Analysis Core Assets & Competencies Strategic Option Evaluation Implementation Planning Opportunity Scoping Concept Development Customer segmentation Proposition Development POC Planning & Pilot Development Pricing Strategy Partner Strategy Financial Analysis Strategic Alignment Action Planning & Management Stakeholder Analysis & Management Deliverables Management Sales Training Account Planning Consultative Sales Engagement White Papers and Sales & Marketing Collateral Partner Programmes Joint Proposition Development

4. Contents I Executive Summary: Introduction Current Telecom Operator Challenges Current Operator Strategies Introducing 2-sided Markets Role of this Report Telco Two-Sided Business Model Options – Scope to Grow & Grow Defining the Scope - Top Down Approach Key 2-sided Market Options Required Telco Skills and Assets

5. Contents II Sizing the Platform Opportunity – United we Stand; Divided we Fall Sizing the 6 Horizontal Capabilities: Identity, Authentication & Security Advertising, Marketing Services & Business Intelligence E-Commerce Sales Order Fulfilment – Off-line Order Fulfilment – On-line Billing & Payments Sizing the Top 4 Verticals: Financial Services Government & Education Wholesale & Retail Distribution Printing & Publishing The Horizontal Opportunity - Some Every Day Business Process Examples Sizing the Every Day Business Process Market Conclusions & Implications

6. Contents III Case Studies – Telecoms is lagging other Industries Case Studies from Telco Case Studies from Other Industries Implications for Sizing the Platform Opportunity Other Conclusions & Implications Conclusions & Recommendations Develop a long-term Strategy & Business Case Collaborate to Develop Interoperability Build Commercial as well as Technical capabilities Build CRM capability Summary Glossary & Appendix

7. 5. Case Studies – Telecoms is lagging other Industries Case Studies from Telco Case Studies from Other Industries Implications for Sizing the Platform Opportunity Other Conclusions & Implications

8. We will explore six non-Telco two-sided market case studies CASE STUDIES FROM OTHER INDUSTRIES 1. See Introducing 2-sided Markets: What Type Of Role Should Platform Play? for details Company Industry Platform Type 1. 1 Google Web Search/Advertising Audience Builder 2 Amazon E-Retailing Matchmaker 3 Monster Recruitment Matchmaker 4 iTunes Music Matchmaker 5 Betfair Gambling Matchmaker 6 AP Moller-Maersk Logistics Cost Sharer

9. Google has changed the ad industry by giving products away to end users for free (in return for advertising), as well as reducing advertising costs for brands Google has Achieved Scale & Cost Leadership A great search algorithm is important but real advantage comes from… … massive investment in Google platform… Very large numbers of commodity servers Open-source software General-purpose computing: The platform is not dedicated to individual products: these are merely applications that run on it Virtualisation: Tasks are split across many physical machines, providing high availability and extreme scalability Peering: Rather than paying for transit Developer-friendly design: Open APIs for everything … which means tiny marginal costs, so Google can make things free and/or cheaper than others Huge Scale & Cost Leadership FREE products for end users CHEAPER advertising for brands = + CASE STUDIES FROM OTHER INDUSTRIES: GOOGLE Search Maps Email PIM Documents Reader Etc. Opening up the market to SMEs Extending the reach of larger corporations

10. In its first 9 years, Google has achieved strong growth and now dominates the web search market Seven times larger in year 9 compared with the largest mobile operator at the same stage (Vodafone): But still a small fraction of the current global mobile industry (around 2%) Dominant player in web search: 58.4% share of (9.6 billion) US searches in December 2007 1. Even if Microsoft does acquire Yahoo!, the combined entity will only have a share of 32.7% (Microsoft 9.8% and Yahoo! 22.9%), putting them way behind Google Winner Takes All Position! CASE STUDIES FROM OTHER INDUSTRIES: GOOGLE 1. comScore, 2008

11. But Google faces at least two major obstacles in areas where operators are very strong Sub-Scale in core functional areas: Voice & Messaging (GoogleTalk) Billing & Payments (Google Checkout) Retail sales and customer care Interoperability (Google’s proprietary products do not interoperate with other services easily) Limited Knowledge of Customer: Search terms tell Google about a customer’s immediate context only – not about their personal data, preferences, history, relationships MY PERSONAL DATA MY STUFF MY IDENTIFIERS MY INTERACTIONS MY RELATIONSHIPS MY CONTEXT MY DEVICES Weak! CASE STUDIES FROM OTHER INDUSTRIES: GOOGLE See Key 2-sided Market Options: Required Telco Skills And Assets for detailed description of each operator data asset

12. One way Google has sought to address obstacles is acquisitions, where it has focused recently on communications, security and customer analytics Source: http://en.wikipedia.org/wiki/List_of_Google_acquisitions CASE STUDIES FROM OTHER INDUSTRIES: GOOGLE Date Company/Product Business Area Value (USD) 2001 Deja's Usenet archive Google Groups. undisclosed Outride, Inc. Spin-off from Xerox PARC. undisclosed 2003 Pyra Labs Blogger. undisclosed Neotonic Software CRM technology. undisclosed Applied Semantics Advertising technology. $102 million Kaltix Search engine technology. undisclosed Sprinks Paid listings unit of Primedia. undisclosed Genius Labs Blogging undisclosed 2004 Ignite Logic Website creation technology. undisclosed Baidu (2.6% stake) Chinese language search engine. All shares were sold in June, 2006 $5 million Picasa Photo management software. undisclosed Keyhole, Inc. Mapping software; used in Google Earth. undisclosed Where2 Mapping software; used in Google Maps. undisclosed ZipDash Used in Google Ride Finder. undisclosed 2005 2Web Technologies Web-based spreadsheet. undisclosed Phatbits Widget engine. undisclosed Urchin Software Corporation Web analysis. undisclosed Dodgeball Social networking. undisclosed Reqwireless Web browser and Mobile email. undisclosed Current Communications Group Broadband internet. $100 million (partial investment) Android Software for Handheld devices. undisclosed Skia Graphics software. undisclosed Akwan Information Technologies Latin American internet operations. undisclosed allPAY GmbH, bruNET Mobile Solution Provider, Germany undisclosed AOL (5% stake) Internet. $1 billion Date Company/Product Business Area Value (USD) 2006 dMarc Broadcasting Radio advertising software and platform. $102 million Measure Map Blog analysis. undisclosed Upstartle Writely, online word processing. undisclosed @Last Software SketchUp, 3-D modeling. undisclosed Orion Advanced search method. undisclosed Neven Vision Computer vision undisclosed JotSpot Website applications undisclosed YouTube Video sharing (San Bruno, CA) $1.65 billion Endoxon Mapping solutions $28 million 2007 Xunlei (partial acquisition) Network, file-sharing. undisclosed Adscape Video game advertising $23 million Trendalyzer Software undisclosed Tonic Systems Presentation software undisclosed Marratech video conferencing software Video conferencing (Stockholm, Sweden) undisclosed DoubleClick Online Advertising $3.1 billion GreenBorder Technologies Desktop enterprise security undisclosed Panoramio Geospatial Photo-sharing Service undisclosed FeedBurner RSS Feeds (Chicago, IL) $100 million PeakStream Parallel Processing undisclosed Zenter Presentations Software undisclosed GrandCentral VOIP Phone Aggregation (Fremont, CA) $45 million ImageAmerica High resolution aerial cameras undisclosed Postini Communications Security (San Carlos, CA) $625 million Tusli Google Blogger Api Engineering Team undisclosed Zingku Mobile social network and communication platform undisclosed Jaiku An activity stream and presence sharing service that works from the Web and mobile phones (Helsinki) undisclosed

13. Google is also investing heavily in trying to learn more about end users… Google has developed three services which aim to capture more about end users’ behaviour: Google Analytics Which tracks user behaviour on Google customer websites Google Toolbar Which tracks end user behaviour across the web Google may collect information about web pages that you view when you use advanced features such as PageRank, SpellCheck, AutoLink, and WordTranslator. However, these advanced features can be easily disabled or re-enabled at any time by selecting "Privacy Information" under "Help" in the Toolbar's "Google" menu. To learn more, please read the Toolbar privacy policy. Google Accounts Which develops a social graph of a user via their activity on Google email, documents, calendar, reader, Talk etc. Google can now also display a mobile user’s location on Google Maps without GPS by triangulating signal strength data from nearby cell towers CASE STUDIES FROM OTHER INDUSTRIES: GOOGLE

14. … and is paying network partners more for collating users with specific characteristics Google’s Traffic Acquisition Costs (TAC), the portion of revenues shared with Google's partners is rising in absolute and relative terms: Increased to $1.44 billion in Q4 2007 from $1.22 billion in Q3 2007 TAC as a percentage of advertising revenues was 30% in Q4, compared to 29% in Q3 The majority of TAC expense is related to amounts ultimately paid to AdSense partners (websites that stock Google advertising inventory), which amounted to $1.31 billion in Q4 2007 In spite of Google’s dominance, AdSense Partner payments have been rising over the last 6 quarters (see chart): Websites with strong communities of people (niche retailers, blogs and social networking sites, such as MySpace) have been able to extract more money from the giant This demonstrates the high value Google places upon being able to aggregate users with specific characteristics Source: Google company data CASE STUDIES FROM OTHER INDUSTRIES: GOOGLE

15. There are some clear lessons for operators from Google’s success and current strategy Collaboration is critical to build scale: No operator has sufficient scale to build a credible platform on its own Open up, standardise and simplify: Adoption has to be very easy (automated) for upstream players and end users Invest for operating efficiency: Relentless reduction in costs will open up new customers and markets – aim to re-engineer industries as Google has done with advertising End user data is VERY valuable: If you can use it effectively: Operators currently have lots of data and no information; Google thrives on a fraction of the data available to operators Google is in a strong position, but operators have some clear advantages for building 2-sided platforms. Can they can exploit them? CASE STUDIES FROM OTHER INDUSTRIES: GOOGLE

16. Google – SWOT Opportunities Stands to capitalise on growth of existing search advertising market Building and buying assets to capitalise on new search / advertising-based media (e.g. YouTube) Allowing “mash-ups” of its assets puts Google at the core of many emerging third-party services Weaknesses Sub-scale in key areas of a 2-sided business model and possess a fraction of the user data that operators have Will an increasing requirement to support its existing business reduce its ability to innovate in the emerging broadband web? Recent acquisitions imply this may be an emerging issue Threats Nearly all developments in the Search / Advertising market impact Google, and as the overall area attracts interest, more competitors will arrive Yahoo and MSN are developing their Ad-based services and business models to compete more effectively and a merger of the two could provide a powerful competitor Strengths High level of market recognition globally Large global user base Currently extremely profitable search advertising-based business model Strong technology base Cost leadership Arguably the biggest advertiser network in the world CASE STUDIES FROM OTHER INDUSTRIES: GOOGLE