We’ve all watched over the past week the mess that is Apple’s PR over tracking people’s location in iOS4.  Apple entered a state of denial in being caught doing such a heinous action that it can not even admit the act to itself.  A team of researchers discovered that iOS4 is (was) secretly obtaining the devices location and recording it to a hidden file, raising obvious privacy concerns and questions as to why Apple would be storing such information. The researchers believe it is intentional, as the file is restored after backups and even when the user switches to a new device. Alasdair Allan and Pete Warden of O’Reilly presented their findings at the Where 2.0 conference.

This brings me back to an issue I’ve discussed over the years, for example in this article from 2009, that we can not look at the two-sided model as equally addressable sides.  Customers pay on three dimensions: cash, time and privacy; creating a ‘Customer Pay-Space.’  It’s important to remember with the non-cash dimensions (time and privacy) value is originating from the user/customer and that value has ownership, as Apple realizes.  The reason Apple overreacted to the allegation is the bulk of its money is from customers buying products, that revenue stream can not be harmed, creating negative PR on tracking its customers (see the recent South Park episode for an example of negative PR) cannot be tolerated.  While Facebook and Google have done much worse invasions of privacy and will do so in the future, its not their customers (that’s the advertisers / VCs) only their users they’re abusing.

So back to the why I think the Two-sided Business Model is partially broken.  Let me be clear that the original thinking from Martin Geddes on the money being left on the table by operators in the core transaction of a voice call is not in anyway broken, it is the core of communication enabled business processes, a category of services operators must adopt to embed voice into many other ecosystems to retain value.  And as O2 has shown in its recent advertising initiative a segment of customers will accept adverts in exchange for vouchers on their service.  So I guard against “black and white” thinking on this topic, I’m NOT saying the two-sided model is wrong in telecoms, rather its broken.  As a side note Martin Geddes is now running a successful independent consulting business with some exciting products coming to market very soon, so keep an eye on his site and weblog.

The reason I highlight its partially broken is its become over-used and used without thinking.  I’m seeing too many discussions where ad-support and targeting are glibly used without recognition that our industry survives because customers pay for services, and to retain those customers we must maintain that focus, else suffer the problems Apple is suffering and BT Phorm has in the past.  Its the customer that pays, they pay on three dimension, and we survive because the customer pays us cash, and there is no magical transition from a completely cash-pay model to a completely time/privacy-model.  There are some interesting opportunities in ad-support and targeting but they remain niche, almost in the noise compared to delivering more and better services to customers that pay.

So let’s remember the model we live-off, and keep our focus on our paying customers, and not be distracted by a market that is a fraction of a percent of telecoms. To quantify: Telecoms is $2T, total advertising spend is $500B (US is $300B) so we’ll not discuss US bias in using advertising, online is about 15% of that and addressable telco a fraction of that, say perhaps $10B globally, that’s 0.5% of the total telecoms revenue.  Now of course concepts such as Martin’s around the value of voice opens up much more value than just advertising, but I’m focused on where I’m seeing two-sided being used without thinking.

So please avoid using 2-sided business models, perhaps 1.005-sided would be more accurate?  Let’s focus on service and customer experience innovation – delivering new and improved experiences to our paying customers (both business and consumer) everyday.