Dominant revenue streams

Ask your friends what business Google is in and the answer you’ll most likely get is “search.” And they would be wrong. Google is, first and foremost, an advertising company. A full 97 percent of its revenue comes from advertising on its various properties, including YouTube, plus partner sites through its AdSense product. Sure, Google has Android and Chrome OS and everything else, but it doesn’t make money from them — they’re just there to get people to watch more ads.”
Jordan Golson
on Gigaom.

For the last week or so, I’ve quoted various aspects of power law distributions (ie the head and long tail curve) within OSS so let’s continue with the theme shall we?

At the time of writing, Google’s market cap sits at $435B. As you know, it makes lots of pretty cool stuff and is investing in other initiatives that are likely to change our whole way of life. But 97% of its revenue comes from a single bucket and it has built many strategies around diverting more into that bucket. Interesting.

The Google revenue numbers take the power law to the extreme. Assuming Google’s second biggest revenue stream contributed most of the remaining 3% of revenues, then it is 30x more reliant on advertising than any other business asset. (Does this also make Google more susceptible to disruption than most I wonder?)

As Peter Thiel has stated, “It’s troubling if a startup insists that it’s going to make money in many different ways. The power law distribution on revenues says that one source of revenue will dominate everything else. Maybe you don’t know what that particular source is yet. But it’s certainly worth thinking about. Making money with A is key. Making money with A through E is terrifying from an investor’s perspective.”

This is an interesting concept for OSS vendors to consider. Interesting because I’ve seen vendors flip-flop between wanting to be product companies (focussing on licence / maintenance-based revenues) and integration companies (focussing on project / services-based revenues). The challenge is that it can be difficult to combine both because products and services require fundamentally different mindsets. The other challenge is that OSS licensing revenue is difficult to grow exponentially and OSS project revenue tends to deliver very lumpy cashflow.

Tying into the key concepts from the previous two blogs (last mover monopoly and ecosystems), I suspect a future monopoly player will emerge from transaction-based revenues that leverage an ecosystem of product and services providers to deliver significant per-transaction-based value. And I suspect the perceivable value will need to be delivered as insights to end customers (not just the CSPs‘s operational teams that current OSS tend to target) to set the network effect into motion and deliver rapid growth.

It’s a distinctly different model than the ones that exist in the currently fragmented OSS market though isn’t it?

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