Value creation is changing. MNOs aren’t

MNOs are obsessed with profitability. Every new product, bundle, tariff, package, or service needs to have a business case signed off before it’s released to the market, as does every new capital expenditure.

That sounds sensible. MNOs are businesses, and their shareholders ought to be happy that management is so scrupulous in trying to ensure that every move they make will be a profitable one.

But a funny thing has been happening in the information economy. All the great “over the top” players have made losing money—enormous amounts of it—an integral part of their business model. 

Google is probably the most obvious example of this. By and large, Google makes money by charging advertisers to display ads; 96% of its revenues in 2011 came from advertising. They give away, for free, virtually all of their consumer-facing products: Search, Gmail, Google Docs, Google Maps, Android, and so on. Similarly, Facebook charges its users nothing to use its platform and makes its money selling ads.

The phenomenon is not confined to ad-driven business models. Apple makes money—a lot of it—selling hardware. But then it gives away software (have you downloaded iOS6 yet?) and earns only paltry profits distributing content through iTunes relative to its hardware business. Amazon’s strategy is to do the reverse, selling the Kindle family of devices at cost but then profiting from all the content purchases that customers make using it.

An economist would note that giving all this stuff away generates significant consumer surplus, which just a technical way of saying that many customers would likely pay if they had to. In other words, these companies deliberately and consistently leave money on the table in huge swathes of their business. This is of course not because the bean counters in these organizations are asleep at the switch. Google didn’t forget to charge for Gmail. Rather, Google’s management reasons that it can make more money selling ads to a large number of Gmail users than it can collecting fees from a smaller number of paying Gmail users. A version of this simple math is what has led these tech giants to underprice many of their offerings, with the objective being to drive growth in the core profit-making parts of their businesses.

MNOs don't really do this. It's true that some investments in mobile money have been justified in part by its potential to increase customer loyalty (either reducing churn or increasing ARPU), but when you look closely at the ways these services are priced you will see a slavish dedication to ensuring gross margin profitability on every transaction (pdf). 

Given that MNOs increasingly see these over-the-top giants as competitors, it’s interesting to ask whether they could learn something from this kind of strategic cross-subsidization. What do you think? What, if anything, should operators give away?