There are a number of competing video conferencing applications on the market.
- Explain how this market may develop in the future, defining relevant concepts
- Let’s assume at present there are three leading video conferencing applications, A, B, and C. Application A is available as part of a suite of services, including a search engine, email, and calendaring, at no cost to users. Application B provides higher quality video conferencing, but the length of meetings and number of participants allowed is lim- ited unless you pay a subscription. Application C is made available open source, so users can install and run the application on their own servers, and modify it however they like. Explain the economic rationales that may have been considered by the providers of applications A, B, and C when deciding on their business models.
The first thing to look at is the overall picture of video conferencing. The COVID pandemic is over, leading overall perhaps to a lower demand than in previous years. However, the number of people being connected to the internet is growing, and video conferencing and calling is one of the core applications of such a connection. In addition, many companies are growing internationally, which increases the requirement for video conferencing solutions.
There are various alternatives that all offer relatively similar services. Many individuals have experience using multiple solutions, and the cost of switching is low. Offering such a service requires some amount of technical talent and software infrastructure, but doesn’t necessarily require physical infrastructure — the entry barrier is comparatively low.
Let’s look at our particular example.
Application A is available as part of a suite of services, so I expect the rationale to be related to vendor lock-in. Large enterprises want a single unified system, and may already be willing to pay for other services like email and calendaring. By offering A alongside these other services, they can secure large contracts that are likely very stable — it would take lots of work for a large company to switch vendors.
Application B is a freemium business model, and is thus likely targeted towards individuals. Given that the unit costs of a customer are relatively low for a software-based business (compared to physical goods), the goal with this plan is likely to capture market share by offering free access to the service, and then converting some percentage of these free users to paid subscribers. Since individuals will want to retain access to a video conferencing service, a subscription model makes sense as it capitalizes on this to generate more revenue than a one up-front cost over longer lengths of time. In addition, the cost of a subscription will feel, to an individual, lower than a high up-front cost, despite subscription costs recurring. This will increase the conversion rate from free to paid users. Overall, B is likely trying to be a general-purpose, “default” video-conferencing tool, going for a larger market share rather than significant lock-in.
Application C is meant to capture a (likely small) niche in the market for those that want to design their own solutions. A company like this might run on donations, stepping away from purely profit-driven views of their business. Alternatively, they may be looking to exploit their specialization, offering a highly modular and flexible video conferencing core that they can license to other companies. They can benefit from open-source developers that value the flexibility both from exposure and development effort — many users may contribute features for their own specific use case, and this would improve the product without having to pay for as many engineers. In addition, larger clients may offer engineering help to ensure the quality and security of their video conferencing.
q2
The biggest differences between the market for mobile phone handsets and applications are the unit economics and entry barrier. Each handset needs materials, manufacturing time, distribution, and shipping, and these need to be paid per handset. This means that the unit economics — profit and expenses per handset sold — are very important. This also lends itself to economies of scale, which relates to the second difference: it takes a large initial capital investment to manufacture and sell physical goods. In addition, there are potentials for huge economies of scale — when your unit economics improve the more volume you sell — and this would give incumbents an even larger advantage over new entrants.
Compare this to the applications, where the unit costs are very nearly negligible. A new download might increase server load a small amount, but this is far less expensive than the cost of the raw materials of a new physical good. Software is also much easier to enter, since no physical infrastructure is required, and product iteration is cheap and fast. Software infra expenditure often scales with total volume, so the initial costs may be initially near-zero.
The market for mobile phone handsets has a high entry barrier