Thoughts on Dell’s position in Enterprise IT world

I like to learn about business strategies, particularly in the technology world. This post is just to put into words my understanding of Dell’s position in the Enterprise IT sphere. While I spent a lot of my free time on reading to navigate through as much as possible the abstraction and complexity of the IT world, I can’t understand the products/services as well as I do with, let’s say, a streaming service like Netflix. With luck, I may get some constructive feedback on what I might be incorrect about or what I have here is useful to someone out there.

IT is no longer a cost center to companies. It is where companies gain competitive advantages as the world goes digital. There are several notable trends:

  • While public clouds such as Azure or AWS offer flexibility, geographical reach, functionalities, quick time-to-market and cost-effectiveness, private clouds provide more control and better security. Companies need both. Hence, hybrid cloud is where enterprises are headed. Multi-cloud is a flavor of hybrid cloud in that a firm may use different public clouds. Whether hybrid or multi-cloud model works for one firm depends on the business requirements and resources available to that firm
  • As enterprises have IT footprint on both the cloud and on-prem, it becomes a challenge to manage the whole network. It’s critical to know which data travels to where and whether data is safe. The challenge compounds when the need for productivity forces companies to use 3rd party cloud applications such as ServiceNow, Box and Google Drive, just to name a few. As a result, the management a, automation and security of, as well as visibility into the network are instrumental to a successful hybrid/multi cloud.
  • A lot of companies have operations in different locations. Banks have branches. Retailers have stores. These branches are important touch points through which customers expect to have great experience and services. And these branches need to talk to data centers or cloud application providers. The network that links branches, data centers and the cloud must be secure, efficient, manageable and cost-effective.
  • Brands must release applications fast and often to continuously bring values to customers. From a user perspective, that’s why we often have to update our mobile applications, but there is a lot more that goes behind the scenes for brands to bring new updates to life. In order to have fast and continuous software releases, companies need to set up the necessary infrastructure that allows developers to do their job quickly and efficiently. Hence, software-defined data center (SDDC) and Kubernetes have become increasingly popular. With SDDC, data centers can be set up and later scale quickly as new technological advances increasingly relieve engineers of time-consuming manual workload. With regard to software development, micro-services is the de facto approach in which Kubernetes is a major component. Developers either want to build new software from scratch using Kubernetes or re-package existing applications on a Kubernetes-based platform
Google Trends Graph on Kubernetes

Dell itself

In short, Dell offers services and products that help companies build and scale data centers such as backup, disaster recover, file systems, storage, SDDC solutions such as VxRack. As the majority shareholder of VMWare, Dell integrates a lot of VMWare products in some of its own. The integration is critical to seamless connection between on-prem infrastructure and data on public clouds. For instance, if a firm builds its data center on VxRack, Dell’s SDDC turnkey product, and deploys some workloads on AWS using VMWare on AWS, the data and applications on-prem and on AWS can be set up quickly to talk to each other. Plus, the firm can manage all workloads using the same VMWare interface.

VMWare

Essentially, VMWare has built itself to be the one ingredient that companies wishing to adopt hybrid cloud need. It has built partnerships with AWS, GCP and IBM as collaboration with Azure is reportedly in the work. On top of that, through its offerings such as vSAN (storage), vSphere (compute), NSX (network), VeloCloud (SD-WAN) and a host of services designed for analytics, management and security such as Workspace One, Wavefront, AppDefense or vRealize, it is the glue that connects 3rd party applications, public clouds, private clouds (data centers) and branches.

Through its acquisition of EMC, Dell is the majority shareholder of VMWare.

Pivotal

Pivotal is Dell’s answer to the world’s current obsession with micro-services and Kubernetes. Pivotal offers services that help companies build applications better, faster and more efficiently. Developers want automation to relieve them of infrastructure-managing tasks so that they can focus on developing code, but they don’t want to lose too much freedom in development. Through its portfolio, Pivotal strives to meet those needs. Heptio is their latest acquisition and provides managed Kubernetes services. With Heptio, developers are not subject to the limitations imposed by PAS, but at the exchange of limited automation. With PAS, there is a lot of automation, but developers may not appreciate the rules that come with a higher level of automation. PKS is supposed to bring a balanced mix and the best of both worlds. I wrote a bit about PaaS vs CaaS here

As in the case of VMWare, Dell owns Pivotal by virtue of its EMC acquisition.

Security

Dell has its own security subsidiary in SecureWorks, a $1.8 billion company as of this writing. In addition, VMWare has its own security solutions that are designed to improve security as NSX with micro-segmentation or AppDefense.

Conclusion

The more I read about Dell and its subsidiaries, the more I am impressed by its strategy and growth through innovation and M&A (EMC, VeloCloud, NSX…). Based on my understanding of where Dell stands in the Enterprise IT world, it seems to have the necessary pieces to take advantage of the IT trends mentioned above.

Thoughts on Spotify

Spotify’s business model has been straightforward. Take music from the creators, let users have frictionless access to the content and generate revenue by either ads or premium subscriptions. The company delivers music in an appealing and user-friendly manner to the point that listeners agree to pay a premium for access every month. On the other side, Spotify pays royalties back to artists or labels every time a song is consumed. As the user base grows, Spotify generates revenue from advertisers which want to convey their marketing messages to an engaged audience.

Yesterday, the company announced their latest quarterly earnings and I found the report interesting. First, the number of subscribers. Both Premium Subscribers and Ad-supported MAUs increased.

Source: Spotify Data

There seems to be a seasonality in the subscriber acquisition. Subscriber acquisition seems to pick up more in Q2 and Q4 than in Q1 and Q3. The increase in premium subscribers in 2018 slows down, compared to the pace in 2017

Meanwhile, the Average Revenue Per User (ARPU) has been on decline.

Source: Spotify Data

With regard to revenue, it seems that the increase in subscriber count outweighs the decline in ARPU as revenue is on the rise

Source: Spotify Data

Both Premium and Ad-Supported revenues seem to be affected by seasonality. Ad-Supported revenue growth fluctuates more than Premium revenue growth. In 2018, revenue from ads grew faster than subscription-based revenue.

Source: Spotify Data

Gross Margin for both revenue streams went up with Ad-Supported gross margin growing at a faster clip in the last four quarters

Source: Spotify Data

In Q4 2018, Spotify became profitable for the first time. Free cash flow also reached the all-time high

Source: Spotify Data

Based on the numbers, it seems that everything is going in the right direction for Spotify. User base is expanding, revenue is going up, free cash flow is growing and the company becomes profitable for the first time. Even though ARPU has been declining, it’s understandable as many users were acquired on a discount. However, it’s necessary to maintain the network effect and grow the user base to attract advertisers.

As Spotify doesn’t own the majority of their content and it still has to pay a small royalty for content enjoyed by free users, Spotify faces two significant risks. First, it relies too much on the labels that can take their content elsewhere. Second, paying for content while generating zero revenue from free users might hurt the company’s margin. Hence, it needs original content. Already featuring original series with Amy Schumer and Guy Raz, the company now seems to switch its focus on another source of originals: podcasts.

During the earning call, Spotify announced the acquisitions of Gimlet Media and Anchor. The former is a podcast production company and the latter is a DIY tool that allows publishers to produce and broadcast original podcasts. In the call, CEO of Spotify mentioned that over time 20% of content on Spotify will be non-music and that several potential acquisitions which the company is considering in 2019 will all be related to podcasts.

The acquisitions and focus on podcasts make sense in terms of original content and monetization. Podcasts are gaining in popularity as a form of engaging content. Media outlets have podcasts. Companies have podcasts. Celebrities have podcasts. As an audio platform, Spotify certainly cannot afford to sit this one out. Having podcasts, in addition to music, makes Spotify more appealing. During the earning call, Daniel Elk, CEO of Spotify, hailed podcasts’ positive impact on the engagement of users on the platform. He indicated that podcasts could lure users who wouldn’t have signed up for Spotify. Plus, it’s definitely easier to have access to different content forms on one app than multiple apps. And what’s the better and faster way to be able to produce content than to acquire a proven production firm?

There is also the monetization piece. One revolutionary aspect of Spotify is to help obscure and less-known artists to get their creativity out to the world and get paid. The more their songs are listened through Spotify, especially the Discovery, the more dollars the artists receive. Spotify is in a position to do the same for podcast creators. According to a blog post by Anchor, nearly all podcast advertising concentrates in the top 1% of podcasts. The other 99% have to hope that their episodes are downloaded to the tunes of thousands to be able to attract advertisers. If Spotify can help podcasts generate revenue for their work in the same way as it has done for artists, Spotify can become the Spotify for podcasts and stand a higher chance of securing exclusives and originals in the future.

All in all, I think Spotify is going in the right direction. Securing key capabilities through acquisitions in a key area such as podcasts is crucial to future growth.

Apple’s strategic switch

Disclaimer: I do own a few Apple stocks, but it’s nothing major and this post is just to share my observation of Apple. As a fan of business strategy, I have been a fan of the company and interested in how it performs amid the concerns after the letter to shareholders on 2nd January 2019.

Yesterday, Apple announced their Q1 earnings. A few notable points from their announcement and earning call:

  • Apple no longer reports units sold across their business segments
  • Overall, Apple recorded $84.3 billion, down 5% year over year
  • Products gross margin was 34.3% and Services gross margin was 62.8%.
  • iPhone revenue dropped by 15% year over year
  • Services revenue in Q1 was $10.9 billion, a 19% YoY increase. Service revenue grew from $8 billion in calendar 2010 to $41 billion in calendar 2018, allegedly on pace to reach $50 billion in 2020
  • Mac revenue was up 9% while iPad revenue was up 17%
  • Wearables, home and accessories revenue grew by 33% to $1.8 billion
  • There are 50 million paid Apple Music subscribers, up from 40 million reported in June 2018
  • Apple reported a base of 900 million installed iPhones, out of 1.4 billion active devices in total from Apple
  • There are 360 million paid subscriptions across Services portfolio, an increase of 120 million versus a year ago.
  • This quarter saw 1.8 billion transactions through Apple Pay, twice the volume recorded in the same quarter a year ago
  • In Germany, there are more Apple Pay activations in one week than for Android in one year
  • “Revenue from cloud services continues to grow rapidly with year-over-year revenue up over 40% in the December quarter. And readership of Apple News set a new record with over 85 million monthly active users in the three countries where we’ve launched the United States, the U.K., and Australia”.
  • Ending Q1 2019, Apple cash stands at $244 billion while net cash is at $130 billion

I am a big believer in the notion that business models need to be adapted to the changes in the business environment. No business model could be effective while staying still over the years, especially in the fast-changing world that we live in today. Apple should be no exception and from the numbers reported, it seems to me that they are making changes.  

For years, the bulk of Apple’s business has come from hardware which is differentiated by its exclusive software, especially in the case of iPhone. iPhone revenue has made up approximately 60% of Apple’s turnover. However, the luxury smartphone market has reached the maturation point. iPhone unit sale growth has been either minimal or flat for quarters. Greater China market, which makes up 20% of their iPhone revenue, has boasted challenges to Apple, particularly in 2018. Their iOS isn’t as appealing to Chinese users as it is to users in other parts of the world while competitors such as Huawei and Xiaomi offer alternatives with more or less same features at a lower price. The macroeconomic conditions in China and the trade war aren’t helpful either.

The growth in iPhone revenue has come largely from the price hike which lengthens the upgrade cycle and puts a limit on how much Apple can reach out to potential users. Not everyone can afford those pricey phones. Lowering the prices isn’t the solution. Firstly, Apple is a luxury brand. Lowering prices may leave significant damages to its brand power. Secondly, cheaper phones will require substantial changes to its operations, including supply chain, distribution and Sales & Marketing.

All the signs point to the fact that too much dependence on iPhone is no longer sustainable for Apple moving forward. Enter Services.

Services has been a bright spot amid concerns over iPhone revenue for the past 2 or 3 years, growing at a 20% annual clip. Put that in perspective, their Services revenue this quarter alone is $10.9 billion, almost equal to Netflix’s revenue in 3 quarters in 2018 while Facebook Q3 revenue was about $13 billion. Instead of making money from devices, Apple is betting on users keeping devices longer and paying consistently and more for services. And why not? If the users tend to hold on to devices longer, it makes sense to generate more money from their activities. Plus, margin from Services is substantially higher than that of Products.

And they have been doing a good job. Apple Pay transactions reached 1.8 billion this quarter, 100% YoY increase. Revenue from cloud went up by 40%. The number of paid subscriptions grew by 50% year over year and Apple Music has added 10 million users, reaching the 50 million mark and achieving a 25% growth, since June 2018.

As of June 2017, developers earned $70 billion from App store since its launch in 2008. As of January 2019, the figure went up to $120 billion. Moreover, we are about to see their investment in original content as their streaming service is reportedly going to be live this April.

In summary, Apple seems to be heading to the right direction strategically in my opinion, given the changes in the environment they are operating in. I think the following guidance in the next few quarters will continuously be lower than analyst expectations as the reduction in iPhone revenue may not be sufficiently offset by the growth in Services yet. There is a chance that Apple won’t have the same revenue level as they had at the peak of iPhone-dominated era.

Nonetheless, I think the company is far from the demise alleged by some after a letter to shareholders on 2nd January 2019. They generated $84 billion in revenue and almost $20 billion in net income in 90 days! Instead, the change to be a Services company may be better for the company’s health.

Book: Monetizing Innovation: How Smart Companies Design the Product Around the Price

If you are interested in business strategies and how companies price their products or services, I highly recommend this book. Its thesis can be summarized into: Product the price, don’t price the product. The authors argued that businesses have a better chance at a successful product/service launch if the businesses do meticulous market research beforehand, figure out the willingness to pay from the end users, find out what they want and how much they are willing to pay for the desired features, and finally build the offerings around the price points. A few notable examples that should be studied by business students include:

  • How Porsche could sell 100,000 of their new cars while Fiat Chrysler could only sell 25,000 of theirs
  • How Michelin switched from selling tires to selling kilometers traveled on their premium tires
  • How P&G rose to capture the majority of market share in the razor category in India
  • How DealShield protected billions of dollars in vehicle purchases and earned Manheim millions in revenue and profit

On Compromise Effect

For example, imagine you are in a wine store and want to buy a bottle. You find three options: a $10 bottle, a $25 bottle and a $40 bottle. Which you would you pick? When asked this question, most people would pick the $25…By introducing the $25 wine, you just made the decision process much easier for everyone. They’ll choose the middle option. This strategy is very common in both B2B and B2C companies

On Anchoring Tactics

Another illustration of anchoring is the Economist magazine’s A/B pricing experiment. The experiment divided people into two groups, A and B. The A group was given two choices: $59 for an online only subscription and $125 for a print and online combination. The B group was offered three choices: $59 for online only, $125 for print only and $125 for the print/online bundle. The $125 print-only option was an anchor. Some 84% chose the print/online bundle in group B versus only 32% who chose that bundle in group A.

On Price Conveys Quality

In a 2008 study, Ariely and his colleagues gave two sets of participants the same pill, telling them it was a painkiller (it was a placebo). Informed that the price was $2.5 a pill, 85% of the participants in the first group said the pill reduced their pain. Told the painkiller’s price was discounted to 10 cents, only 61% of the second group believed the pill reduced their pain.

On Apple Watch

At first, it was available only through Apple’s website and the cheapest version was priced at $349, not very cheap. However, Apple’s launch largely drew negative reactions. One stock analyst noted that a components supplier for the watch had produced fewer units than projected, hinting at underwhelming sales. His comment appeared in a July 31 Wall Street Journal headline that sniped, “Glimmers Emerge on Apple Watch Sales and They’re Not Pretty”

All of this was not what Apple wanted to hear. Yet despite the negative press, despite the warnings of purportedly in-the-know investment analysts and reviewers and the rumors of lagging sales, Apple did not drop its price. It held firm.

Based on International Data Corporation and investment analyst estimates of Apple Watch sales from April through September 2015 (the second half of Apple’s most recently completed fiscal year), Apple sold an estimated 8 million watches. Assuming most sold for the entry price of $349, that would make it a $2.8 billion product in its first six months of life.

Book: How the Internet Happened

If you are interested in technology, the intersection of business strategy and technology and the history of the Internet, this book is for you.

It is a succinct chronicle of how Web 1.0 (connecting computers all over the world) and Web 2.0 (connecting all people) happened. Accounts of some of the most iconic and important technology companies in the world were told without lengthy anecdotal details. The author walks you through how Netscape, Yahoo, Google, eBay, Paypal, iPhone and Facebook, to name a few, came into beings and shaped the personal computing. It’s fascinating to read about the bubble in 2001. The fact that companies could raise tons of money regardless of the lack of business models and revenue, let alone profit, is surreal.

Arguably, the biggest point that I get out of this book, in addition to nice history lessons, is that success greatly stems from serendipities. Without an enabling technology, infrastructure or business environment, we wouldn’t have had the household technology names that we do today. For instance, without Netscape developing the Navigator and SSL, who knows whether we would have had different browsers, online payments and arguably the Internet? Without the existence of broadband connection, it’s likely we wouldn’t have had Web 2.0.

Timing is everything. Being early is equal to being wrong, as many companies which went out of business for being ahead of their times could attest. If you doubt the role of luck in success, read this book.

After this book, I can’t wait to read a similar one on the rise of cloud computing and everything that it enables.

Initiatives in the Tourism Industry in Vietnam

First of all, if you are looking for a website to learn more about Vietnam and particularly Saigon, I highly recommend this website – Saigoneer. Its section on street food is a great start. It’s in English and has lots of details.

There are a few upcoming initiatives announced recently in the industry:

  • There will be bi-weekly direct flights form Zurich to Saigon
  • Vietnam Airlines will soon operate direct flights from Danang to Japan
  • Vietnam Airlines is exploring the possibility of direct flights from Vietnam to America
  • Vietnam Tourism Association will soon carry out exams to classify tour guides in the country. Tour guides will be given 3 to 5 stars based on the results of the exams which will be free of charge and voluntary. Also, freelance tour guides are now mandated to be under contracts with authorized tour companies in order to do business
  • BBC Sport reported that a 2020 race in Hanoi, Vietnam was now secured barring an official announcement

Three points here. First, the tourism industry brought in $13 billion in the first half of 2018, an increase of 22% compared to last year. It is huge for a country like Vietnam. We have a lot to offer. A long coast throughout the country. An authentic and exotic cuisine. We have beaches, mountains and Mekong Delta, everything that a tourist can hope to experience. But our tourism has been plagued by the lack of standards in services leading to the poor return rate of guests. Our country is pretty much a myth that is worth exploring once and no more. In business, it costs 6 times more to acquire a new customer than to retain one. This is the same case. Even though the tour guide exam’s effectiveness remains to be seen (we Vietnamese are not known for world class execution), it is a small step towards the right direction. If we want to compete and have more guests return, maintaining high service standards is instrumental.

Secondly, having more direct flights is huge. Thailand and Singapore have two airport hubs in the region and look what the airports have done to their tourism. Direct flights will reduce the hesitation from guests when they have to make a decision on where to visit. Vietnam’s two biggest airports sorely need major upgrade. It’s a pity that some bureaucracy red tape has prevented the expansion of the airport in Ho Chi Minh City. We have the land to do so and the airport is ridiculously right next to the city center. I have been to quite some airports and I haven’t seen one that close to a city center. Nonetheless, having more direct flights will increase our appeal as a destination.

Lastly, I have been hoping for annual international event in Vietnam for years. Singapore’s F1 Grand Prix has been a remarkable success since its debut in 2008. Otherwise, Singapore wouldn’t keep hosting it. A race is usually a combination of music concerts, press conference, other activities and of course the racing itself. With the reach of Formula 1, Vietnam’s brand awareness which has been under-marketed due to lackluster branding and marketing efforts will hopefully be boosted.

Facebook & Privacy First Mentality

Quite a week for Facebook

It has been quite a few days for Facebook. First, two days ago on Techcrunch:

Facebook has confirmed it does in fact use phone numbers that users provided it for security purposes to also target them with ads.

Specifically a phone number handed over for two factor authentication (2FA) — a security technique that adds a second layer of authentication to help keep accounts secure.

Then, a bombshell was dropped yesterday. Per Wired:

ON FRIDAY, FACEBOOK revealed that it had suffered a security breach that impacted at least 50 million of its users, and possibly as many as 90 million. What it failed to mention initially, but revealed in a followup call Friday afternoon, is that the flaw affects more than just Facebook. If your account was impacted it means that a hacker could have accessed any account that you log into using Facebook.

Facebook’s track record in data security and privacy hasn’t been particularly stellar recently. 2018 is not 2010. Facebook doesn’t have the same dominant position as it used to in the social network market any more. Users have plenty of alternatives and substitutes to spend their time on. These scandals, coupled with its role in the “free speech vs hate speech” row, don’t do any good to Facebook’s image as well as its appeal to users when privacy has become more and more pressing as a concern to users.

Privacy & regulations

I have been resigned to the fact that there is no anonymity on the Internet and that complete privacy isn’t possible. Yet, when users trust a company with their data, whatever the data is, it’s the company’s responsibility to protect such data. As many important aspects of our lives take place on the Internet, the need to feel safe online is more overwhelming than ever. Without feeling safe, how could users feel comfortable using a service? Privacy and data security will be, if not already is, expected by default of companies. It’s not a nice-to-have feature any more. It’s a do-or-see-your-competitors-get-ahead game.

But companies are not in the business to lose money. If they are not legally required to bolster their security, don’t expect them to. That’s why companies fought hard against GDPR or privacy laws passed in California this year. And this is where I don’t understand the criticisms of some towards regulations such as GDPR. Yes, no law is perfect, especially in the beginning. That’s why we have amendments. GDPR is not an exception. It is a great first step to give power back to users and force companies to be liable for their actions/inactions.

A common criticism that I came across towards GDPR is that it makes it too expensive for small companies and startups to comply, widening the moat or competitive advantage gap between giants such as Google/Facebook and SMBs. Well, if a company with a deep pocket and better security measures has 10% of its 500,000 in user base breached, the impact is 50,000 users. If a small company with fewer recourses and much weaker security measures loses all of its 50,000 users, the impact is the same as in the first scenario. Hence, breaches at SMBs can have significant damages and ramifications as well.

Sure, the best case scenario is to have different levels of compliance applied to companies of different size. I’d love to see that happen. Nonetheless, without privacy regulations, imagine how much companies would care about our data and how much of a mess it would be. Despite having HIPAA in place, every year has been a banner year of cybersecurity in healthcare in the US and healthcare organizations spend 3% of their IT budget on cybersecurity. Verizon reported in their 2018 Payment Security Report that only 40% of all interviewed companies in North America maintained full compliance with PCI. Despite all the scandals related to data security in the past, Facebook still lets more unfortunate events happen. To be fair, I don’t imagine having impeccable security is easy. However, would companies even try to secure your data without any legal requirements?

Progress happens when we raise standards. Would cars be more environmentally friendly if we hadn’t enforced regulations on emission quality? If a university wants to raise its standard for incoming students, will it lower or raise the requirement for GMAT/SAT? Will a drug be safer for patients if the FDA enforces more or fewer tests? Big companies have the means to comply with stringent privacy regulations. Small companies/startups, though difficult, have more access to capital funding. Plus, public cloud providers are investing to have their infrastructure compliant with many compliance regulations (See more here for AWS compliance and Azure compliance). Regardless of size, companies have to take privacy seriously and consider it an integral piece of the puzzle, a competitive advantage if done right or a threat to their competitiveness if ignored.

Coworking space + Managed Services?

I have been thinking about the prospect of marrying the two concepts: coworking space and managed services?

Coworking Space

Coworking space shops help individuals, startups and even big corporations operate without worrying about renting office, meeting rooms, equipment, or Internet. Members can also rely on these shops for tasks such as mailing, forwarding or receiving guests at reception desks. The main premise of coworking space is to help businesses focus on what matters by outsourcing low-ROI tasks to the host and to get off the ground with as low a fixed cost as possible. Moreover,  there is another marketed value proposition that coworking space facilitates random interactions and access to like-minded individuals, potential team members or investors. It may be true. Some try to offer added values such as workshops or consulting. Nonetheless, such propositions are commoditized now. There is no differentiation among coworking space providers. If we follow the continuum of resource sustainability by Jeffrey Williams, coworking space seems to fall into fast-cycle bucket. In that bucket, the only way to compete is fast time-to-market

Continuum of Resource Sustainability

Source: How sustainable is your competitive advantage? – Jeffrey Williams

Managed Services

Think about managed service providers as your extended IT department. Their primary premise is the same as coworking space providers. Managed service providers help companies to manage mundane & low-ROI tasks such as patching, updates, monitoring, installing and to start a business with a low CAPEX. Instead of spending a lot of money and time procuring hardware and setting up your own environment, you can go to Managed Serviced Providers and everything can be ready in a matter of hours or a day. Additionally, your developers don’t have much experience in migrating to public cloud? These providers will assist you. You want your developers’ valuable time on real innovation and coding instead of managing public cloud environments? These providers will do so for you. While these public cloud providers have incredible global footprint and a variety of services, they don’t necessarily offer great customer services. Unless you are willing to pay for technical assistance packages that can run up to $15,000/month, there will be little hand-holding. That’s why managed AWS market has a CAGR of 13.9%

Why not combining the two?

The two services share the same primary premise. Most startups and businesses nowadays leverage IT to gain competitive advantages and meet customer needs. Chances are that many startups or small businesses at coworking space leverage Internet and the cloud extensively. If coworking space shops can bundle managed services with their memberships, it will create more value and appeal more to members. If a coworking space can have at the minimum one or two certified Azure or AWS engineers in-house to help guide startups with their infrastructure, wouldn’t that be something of value?

In my mind, it makes sense to offer an infrastructure-level service that every Internet startup will need. Eventually, if enough coworking space providers offer managed services as well, there will still be no differentiation. The keys are time-to-market and the art of bundling and pricing. It’s quite intriguing to not see many coworking space shops do so. Perhaps, I am missing something. Or not.

Sinemia and MoviePass

If you live in the US and are a fan of watching movies at cinemas, chances are that you have heard of a company called MoviePass. It is famous for its unprecedented business – $10/month for one ticket every day. The company has suffered a great deal financially and operationally for its business model, including an urgent financing round to keep its servers running, downtimes, unimpressive customer services and frequent changes to its pricing.

In the subscription world, the mandate is that once a user subscribes, the more the subscriber consumes services/content, the better and marginal cost is trivial. Take Netflix for example. After a successful subscription, a user can watch as many movies and for as many times as possible. Netflix takes in minimal marginal costs (probably for servers, storage and networking) for every time a movie is watched. In the case of MoviePass, it’s not the case. Every time a ticket is dispensed, MoviePass pays the cinemas either the full amount of the ticket or the majority of it. Slap on it the cost of marketing, financing and operations and the business loses money.

How does MoviePass make money in that case? I suspect that MoviePass prioritizes growing its user base to the point that it is big enough for the company to convince cinemas to cut its a much better deal. Advertising can be another avenue.

The failure of MoviePass is also from the customer segmentation perspective. We moviegoers differ from one another in our consumer behavior. Some go to cinemas every week, some go for only blockbusters and some only do so once in a while. The difference in behavior requires multiple offerings from MoviePass. The less frequent users don’t feel motivated to keep a subscription every month. Movie junkies who go as many times as possible will bleed the company dry. There are some users who look at the release schedule, subscribe for only one month in which I can watch movies I like and then unsubscribe, myself included. Such users don’t offer much value to MoviePass as they don’t, ironically, consume enough to contribute to MoviePass’s value as a company.

The “one-size-fits-all” model that MoviePass is famous for doesn’t take into account any user behavior. Unsurprisingly, it failed.

Sinemia today announced an unlimited plan. For $30 bucks, users can get a ticket every day and advanced bookings are allowed (not possible with MoviePass). The difference obviously is a higher price tag that comes with the plan. I suspect that even at $30/month, it is still a money-losing deal for Sinemia but it is less damaging than a $10/month plan. Moreover, Sinemia has 5 different plans now. Each appeals to a different segment of users.

Sinemia

To discourage users from unsubscribing early, Sinemia enforces an initiation fee for monthly-based plans. That way, users care more about the subscription and are motivated to stay longer. If users unsubscribe, Sinemia gets more revenue in return. If users want to avoid the initiation fees, the only way is to be locked in for a yearly bill.

Even though Sinemia has multiple plans and higher pricing points, Sinemia will try to enlarge its user base and leverage it for a better deal with cinemas. What I think will be appealing to cinemas is that Sinemia can prove that it attracts moviegoers in unpopular times during a day. Movie slots are perishable. Once it goes by, there is no way to recover it. Hence, cinemas would be interested in putting butts on their seats during low-traffic hours. If Sinemia can prove that it is able to deliver that, its position will be stronger. Anyway, its business model is saner than MoviePass’.