Break on through to the other side

The growth of digital services has been accompanied by a proliferation of multisided platform models which are considered to pose a potential threat to some of the revenue streams of the more ‘conventional’ single sided models of telecommunications services providers.

In this briefing note we argue that single sided firms can consider different strategies that can support competition with multi-sided rivals, ‘breaking on through’ to a sustainable future. A familiar example of a two-sided platform is a newspaper which brings together two groups of customers – advertisers and readers. Often the advertising revenue is sufficient enough for the newspaper to be given to readers for free. Such models are becoming widespread in the digital world. Many digital services are provided to users without direct payment being required from them. The platform required to deliver the service is often funded instead by revenues from advertisers. In the digital world, such platforms deliver to advertisers an improved ability to target adverts using the data obtained from and about the users of the platform2 . Services like search, email, messaging, social networking, and voice telephony can all be offered using this model today. These models are sometimes seen as a threat to the providers of competing services who have earned their revenues by charging users directly.

In conventional, single-sided competitive markets, prices charged generally tend towards costs. But in multi-sided markets, prices for a service on one side of the market can, and often do, fall below ‘cost’ and often to zero. This raises the question of how firms with single-sided (SS) business models might adapt in order to compete with multi-sided (MS) competitors. This note makes some suggestions by considering the challenge which telecoms operators – as SS players – may face in trying to compete with MS competitors, such as Facebook/WhatsApp3 (FB/WA). Faced with a choice between similar services, one which is free and the other charged for, it is not difficult to predict what users will do. For example, mobile users facing a payment of a few cents every time they sent an SMS have switched to using WA, a similar service allowing them unlimited messaging at a negligible charge. As a result, the volume of messages sent over WA has recently exceeded the volume of SMS sent globally. In such circumstances, the SS player can try to adapt their existing SS platform, or develop an MS approach.

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Source: Frontier Economics

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