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European net neutrality – 1st and 2nd class Internet or the chance for new business models?

October 31, 2015

The European Parliament has approved the new law for net neutrality in Europe and a storm is coming up as lots of people are now talking about different classes for Internet access and a problem for all start-ups and their business models. We discussed it with some colleagues during our EMBA studies at Kellogg University in Toronto and came to a different opinion – it will massively support start-ups with digital business models in generating more revenue. Here is why.

 

Some days ago, the approval from the European Parliament was just there and you heard some people starting to scream out very loud: ‘That is so unfair!’, especially when they read what Timotheus Höttges, CEO of Deutsche Telekom AG wrote in a company blog (see here). We were here at the Kellogg Executive MBA program in Toronto and started a discussion about this and came to a completely different point: This is the biggest chance for companies offering all kinds of web-based business models to turn around user to pay for their service and by that generate more revenue.

 

Why did we come to this conclusion?

Right now the challenge is that most new business models are based on a freemium model, trying to generate as much users as possible and refinancing that by … advertising (as most users do not transfer from free to paid premium services) and of course by users switching to a premium account with more functionality. The additional functionality is for most people not that relevant, so only a small portion of users switches to a paid subscription model, Spotify is a very good example for that. Advertising is not the same anymore, user are finding ways to get around this, so this model won’t work that long due to ad-blockers and mobile devices where there is not too much space to have advertising all around. In the end the users do not have enough incentives to switch to a paid service as everything works pretty well without paying for a service.

And this is the big chance for all these companies: As soon as every user knows that a high quality of service will not be for free, it will be accepted that a premium service with guaranteed speed and no disruptions will cost a little money. And the better thing is that all companies will have to offer that so when everybody does it, the user will get used to it. Just remember when you are in a hotel. The standard Internet access is for free, when you need a higher download rate, please pay. That business model is working as there is a need for that and the willingness to pay. Ok, you can say that YouTube will not let users pay, but this might be wrong. YouTube Red is the first sign how the future will look like. Pay for better service and connection. With the new regulations companies with a digital business model can easily offer a free model with no guaranteed bandwidth, and they can offer upgrade to high availability and by that blame the costs on the network infrastructure provider. What a great deal! It’s is also possible to add a little mark-up on top of the costs for the service so that you can generate revenues. And when a user starts to pay for services, there is a high chance, that this amount will be higher in future.  

Let’s take a look at some sectors that will probably benefit from higher conversion rates to paying services: Gaming, Streaming services and all kinds of urgent services where you can let users pay for preferred delivery.

This won’t work for newspapers as they do not need that much traffic, but it will have a positive effect in telling the user that quality has its price.

 

Lots of new opportunities

There will also be more than one very positive side-effect: Companies will start to develop websites and applications that will run very fast by not loading too much data as these will perform even better than whilst not relying on too much bandwidth. This will help every user to better utilize their mobile phone connections as the speed is limited there too and there is no flat rate for most of us.

Furthermore we might see a shift in valuation of ideas and companies: As user will be more open to paying for fast and high quality services we might see more companies starting to focus on products that deliver results which will be paid for. This will still mean that digital network effects create great value but the ‘winner takes it all’ mentality (see my last blog about this) might be not that frightening anymore.

 

But we have to pay for it and the big guys don’t…

No, there are already services in place that use prioritized data and let the users pay for this, one way (direct) or the other (indirect via more advertising etc.). Paid services mean better utilization of infrastructure as the not needed service will leave the floor, making space for new competitors and services. I think we have lots of the so-called ‘Verbände’ in Germany that will help to look at this critically (whenever they stop screaming to every new challenge).

 

Finally a new challenge

Summarizing, the approval of this new law to net neutrality will bring fresh air to digital business models and will allow new business to start. When the big players like Deutsche Telekom and Vodafone in Germany will have an interesting model, maybe even as a percentage of the revenues made by this services, this can be very interesting for all of us (one exception: The big companies need to pay less, which would effect this negative). Having said that, this will be an interesting transition with lots of new space for disruption as we all agreed on here at #Kellogg.

 

 

 

 

 

 

 

 

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