Welcome to Module 2 on this course on digital business models. My name is Andreas Constantinou, and I'm an Adjunct Professor at Lund University, teaching internet business models for the past eight years. I'm also the CEO and founder of SlashData, a leading research firm, where we help the world understand developers, and developers understand the world. I hope you've been enjoying the course so far. In this module, we'll look at how Apple, Google, Facebook, Amazon, and several other Internet and software incumbents are using digital business models to create, deliver, capture, and defend value. Let's start with Apple. Apple is a hardware business. That means the majority of its profits come from selling a range of products: computers, phones, tablets, TVs, watches, accessories and more. Each of those products has its own operating system: MacOS, iOS, tvOS, watchOS, and so on. Let's look at Apple's mobile platform, iOS. iOS is a software platform connecting several types of people and companies: users, telecom operators, accessory makers, and of course, app developers. iOS transacts with each of these sides in clear ways. To users, Apple offers a premium product experience for a premium price. To telecom operators, also known as carriers, Apple offers access to users with higher disposable income. Those that are able to afford higher-end devices in return for subsidizing its iOS devices. To accessory makers, Apple offers an affluent user base, in return for a diverse range of accessories from headsets to bathroom scales, and a revenue share from the sales of those accessories. Finally, to app developers, Apple offers an affluent base of over two billion devices sold to which they can build apps for. The iOS platform exhibits network effects. The more users that are attracted to the platform, the more developers will build apps for iOS, and therefore, the more users that will be attracted to those apps, and therefore by Apple products. The same effects take place for the other beneficiaries of the network. The more users that are attracted to the iOS platform, the more accessories will be built to work with the platform, and therefore the more users will be attracted by those compatible accessories. These network effects grow the demand for Apple hardware products. In practice, it's the combined network effects between users, developers, network operators, and accessory makers that led to the exponential growth of its app store and propelled the number of apps beyond the reach of the latecomers namely; Microsoft, Nike, and Mozilla leaving the so-called, "app gap". Now, let's examine the architecture of the business model behind Apple's iOS. We'll look at both the traditional business model of Apple as a hardware maker, and its digital business model where it uses network effects to drive demand, and an unfair advantage, to its core business. Apple creates value by the unique design of the Apple phone and tablet products. Digitally, it creates value by helping users do more with their phone, famously known as "there is an app for that", from booking train tickets to playing VR games like Pokemon Go. This is made possible by the millions of apps built by third-party software developers. Apple delivers that value through the device itself, and through its own apps such as Apple Music and GarageBand. Digitally, value is delivered through third-party apps and accessories. Finally, Apple captures value through the sale of the device. The revenue share on music apps, and accessories more than recover the costs. Apple defends then, its business model through the Apple brand, and the unique integration of hardware, software, and accessories. Digitally, Apple defends value through the developer ecosystem, that is locked to Apple products, both in terms of distribution and delivery of apps. Apple's business model is near impossible to copy, not because of the brand, but because of the combined network effects between users, developers, network operators, and accessory makers that have propelled the growth of its apps catalog into the millions. As with other digital business models, value in iOS is created with the millions of third-party apps which are bundled with Apple's core business of hardware. That means, Apple apps cannot be distributed and run on other devices other than Apple. Now, let's take a look at a slightly different business model, that of Google's Android. Google is in the ad business, that is making money from advertising through its own inventory and third-party publishers. Google offers a range of products. Let's look at some; AdWords, Admob, Android, Search, Chrome, Maps, YouTube, Gmail, Docs, Photos, Translate, Google Wallet, Pixel phone, Assistant, and many more. Each of those products is connected to Android-based mobile devices, and the Android operating system that powers them. So let's now take a look at Android. Android is a software platform, connecting several types of people and companies. Android transacts with each of these sides in very clear ways. Android gives users access to an extremely diverse spectrum of devices and device price points from around $20 to $1,000 smartphones. This allows Google to capture users in price-sensitive markets. For example, Africa smartphone users are primarily using Android. To handset makers, Android offers a ticket to the smartphone market, and operating system with off-the-shelf hardware support that can be turned into a smartphone within practically only a few weeks. To accessory makers and app developers, Android offers a user base of over two billion users that they can build accessories and apps for. The Android platform exhibits network effects. The more users that are attracted to Android devices, the more developers will build apps for them, and the more users will buy devices in order for these users to access the apps. These network effects grow the demand for the Google ad business. The ad business uses Android to deeply profile user habits, so that it can later target them through mobile or desktop ads. Let's now map the Android business model and its architecture. Android creates value by enabling the creation and sale of mass market communication devices. Over 80 percent of smartphones sold today are Android devices. In terms of the business model, digitally, Android creates value through millions of third-party apps which help users do more from photo scanning to learning a new language, and help developers reach over two billion users. Android delivers value through devices. Digitally, it delivers value through apps in its digital business model. Android helps Google capture user intelligence, and generate ad views which are monetised through its advertising business, whether the user is on a mobile device or a desktop device. Finally, Google defends its business model through the brand, as "Android" its trademarked, and can only be used with Google's approval. Finally, digitally, Google defends its business through the developer ecosystem that is locked to Android-powered products, both in terms of distribution and delivery, with the notable exception of China. Android's business model is near impossible to copy, not because of the Android brand or Google's financial power as many would think, but because of the millions of apps available for Android devices. It's worth noting that Google has several ways of locking down Android despite releasing the base operating system under an open source license from time to time. For example, Google controls the Play Store which is not open-source, and through which Android apps are distributed. Play Store is in fact only available to Google approved handset makers and models. Moreover, Google controls the most valuable APIs such as maps, identity, and payment which are not part of the open-source Android, and are only available to Google-powered handsets. In the next lesson, we'll look at two more digital business models, those of Facebook and Amazon.
