THE NETWORK MULTIPLIER 4 Steps to Driving More Value & Better Performance Table of Contents H 1 2 ••••••••••••• ••••••••••••• ••••••••••••••••• Executi ve Module 1: Module 2: SUMMARY ORIENTATION ASSESSMENT This workbook is about the power of networks – social, There are four business models, some older than others, Inventory all your intangible assets, paying specifi c attention business and fi nancial – and how they can help you some more valuable than others. Read this chapter and to your dormant customer, employee, partner and investor create more value and better performance. learn which business model is yours. networks for untapped sources of value. .......................................................................................................................................................................................................................................................................................... 4 The Network Multiplier • 4 Steps to Driving More Value and Better Performance Table of Contents 3 4 H ••••••••••••••••• ••••••••••••• ••••••••••••• ••••••••••••• Module 3: Module 4: Executi ve INVESTMENT MEASUREMENT CONCLUSION Reallocate your capital to networks in order to benefi t from Add network and other intangible key performance indicators Digital networks and software are eating the world. Use this lower marginal costs, more growth and higher investor to your fi nancial measures to insure that you are measuring work book to insure that you are leveraging your digital and valuations in today’s hyper connected world. everything that matters. network assets to prosper. .......................................................................................................................................................................................................................................................................................... Table Of Contents • © Copyright 2014, OpenMatters LLC 5 Executive Summary 1 Executi ve Summary “ In the network economy, success is self-reinforcing; it obeys the law of increasing returns” Kevin Kelley, Co-Founder, Wired Magazine .......................................................................................................................................................................................................................................................................................... Executive Summary • © Copyright 2014, OpenMatters LLC 9 H Executive Summary In the spring of 2014, the media, from the Twitterverse to Bloomberg to CNBC and the WSJ, was buzzing about the $19B acquisition of WhatsApp by Facebook. The topic of discussion was, does the messaging service that generated approximately $20M in revenues in 2013 really merit a valuation of almost 1000 times revenues? Bloomberg put it well with its article called: Facebook Values WhatsApp Like Miracle Drug: Real M&A, making the point that the companies most valued by the marketplace are usually developing new treatments for cancer or Diabetes, not sending LOLs and OMGs. The question on all our minds was, WhatsApp with this valuation? .......................................................................................................................................................................................................................................................................................... 10 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Summary According to our research, WhatsApp is not a once-in-a-decade outlier. Personal Notes: Cloud-based file sharing service Dropbox made news as well, receiving _______________________________ _______________________________ venture capital funding at a valuation of $10B, or 40x current revenues. _______________________________ _______________________________ Airbnb.com recently raised funding at a valuation of $10B, which would To better understand this phenomenon, we turned to the data and _______________________________ make it worth more that Hyatt Hotels or Wyndham Worldwide and worth examined 40 years of financial data for the S&P 500 companies to nearly 20x revenues. Taxi-replacement service Uber was recent ly valued see how valuations trends have evolved. Our research led us to _______________________________ at $18B, estimated to be 10x revenues. Most recently Alibaba’s IPO three key learnings: _______________________________ raised funds of approximately 10x revenues. And this is not the entire list of members to the multi-billion dollar startup club who tout innovative, 1. There are four business models _______________________________ new business models. 2. Network Orchestrators outperform other companies _______________________________ Indeed, there appears to be an emerging trend in the types of businesses that investors prefer, and today’s most preferred businesses are receiv- 3. Most companies are missing this opportunity _______________________________ ing the highest valuations of all times! Companies with more traditional _______________________________ businesses are left wondering why these upstarts merit such exuberant Let’s look at each of these findings in more detail. valuations. Are they more profitable? Do they see faster growth? Do they _______________________________ have higher return on assets? Our answer is yes, to all of the above. _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ .......................................................................................................................................................................................................................................................................................... Executive Summary • © Copyright 2014, OpenMatters LLC 11 H Executive Summary 1. There are four business models: To begin, we searched for a simple way to characterize the different types Case Study: of business that were winning and losing value in the market. Because the Hilton Worldwide Holdings just invest- ed $550M in its information technol- businesses earning outstanding valuations today represent a variety of in- ogy to meet its customers where they most often are: on their mobile devic- dustries (real estate, transportation, financial services and manufacturing) es. Hilton is allowing guests to check in and out, select rooms, and even unlock we quickly moved past the standard industrial classifications and developed doors with their cell phones – a change that is most likely convenient for both a new framework based on business model, or “the rationale of how an or- guests and for hotel staff. As a bonus, ganization creates, delivers, and captures value.” We found that there are Hilton is able to connect valuable data about their guests and their preferenc- four foundational ways that companies create and deliver value to their cus- es in the process. http://blogs.wsj.com/cio/2014/08/04/ tomers. Companies may operate with a number of these models, but most hilton-cio-says-it-is-out-from-the-back- room/?mod=wsj_ciohome_cioreport have a dominant preference. The four business models are: Asset Builders: Technology Creators: These companies use capital to make, market, distribute, and sell These companies use capital to develop and sell intellectual property physical things. Examples include Ford, Walmart, and FedEx. This such as software, analytics, pharmaceuticals, and biotechnology. business model has the highest marginal cost because the cost of Examples include Microsoft, Oracle, and Amgen. producing or moving additional units requires essentially the same amount of input or effort. Network Orchestrators. These companies use capital to create a network of peers in which Service Providers: participants interact or transact with the many other members of the These companies use capital to hire employees who provide services network. They may sell products, build relationships, share advice, give to customers or produce billable hours for which they charge. Examples reviews, collaborate, and more. Examples include eBay, Red Hat, and include United Healthcare, Accenture, and JP Morgan. Visa. This business model has the lowest marginal cost because the network itself creates value through member participation. For example, users of TripAdvisor create value for the company when they write reviews. .......................................................................................................................................................................................................................................................................................... 12 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Summary Personal Notes: _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________