Two recent articles reminded me how important it is to “follow the money” when understanding software platforms. Many software platforms have a “free” (or subsidized) side and a “money side”. The money side is where the revenue comes from. When they talk about themselves, most software platforms emphasize the “free side” of the platform. The money side of the platform is typically only discussed in the financial statements. If you want to understand what the platform does, you need to understand both sides of the platform. But, if you want to understand how the platform makes money, you need to act like Robert Mueller. Follow the money.
Free Side versus Money Side of Platforms
In the table below companies describe both their “free side” and their “money side” in their own words. (The money side description comes from their 10-Ks. The exception is Outcome Health which is not public). I chose to include Google and Facebook because they are two most famous examples of software platforms which have a free side but monetize through online advertising. (And they dominate online advertising!) I chose the other two examples, Outcome Health and American Express because they were recently in the news.
| Platform | Free Side | Money Side |
|---|---|---|
| Google’s mission to organize the world’s information and make it universally accessible | We generate revenues primarily by delivering relevant, cost-effective online advertising. |
|
| Our mission is to give people the power to share and make the world more open and connected. | We generate substantially all of our revenue from selling advertising placements to marketers. | |
| Outcome Health | Outcome Health exists to activate the best health outcome possible for every person in the world. | Outcome Health, installs video screens in doctors’ offices and charges pharmaceutical companies to run ads on them aimed at patients. |
| American Express | American Express Company (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. | Unlike our competitors in the payments industry that rely on revolving credit balances to drive profits, our business model is focused on Card Member spending. Discount revenue, which represents fees generally charged to merchants when Card Members use their cards to purchase goods and services on our network, is primarily driven by billed business volumes and is our largest single revenue source. |
The contrast between these companies’ stated “missions” and how they derive revenue is stark. I’m not saying these companies are lying. They are just emphasizing the free sides of their platforms in their mission statements and the money side in their financial statements!
Outcome Health
I included Outcome Health in the table because the Wall Street Journal recently ran a negative article on Outcome claiming that it misled advertisers on how many people were seeing its ads. For me, this was not the most interesting part of the article. After all, the online ad industry is rife with questionable measurements. The most interesting part was that I finally figured out how Outcome Health made money! Earlier this year, Outcome Health raised money at a $5.5 billion valuation. I wanted to write about it at the time, but I could not quite follow the money! (When I saw that Outcome Health had changed its name from ContextMedia, I should have known!) The Wall Street Journal article made the money side of Outcome Health completely clear; they sell ads.
American Express
I included American Express on the list because:
- it is a great example of a platform that subsidizes one side and charges a premium to the “money side” and
- American Express was in the news recently for this exact reason.
As you know, American Express offers a prestige brand to consumers and businesses. Unlike credit card issuers who earn interest from consumers who do not pay off their bills each month, American Express is a charge card. Consumers and businesses are expected to pay off their bills in full each month. Not only does Amex charge us a reasonable fee, Amex gives us generous perks for using their cards.
On the flip side, American Express pays for the perks with a premium “merchant discount rate”. This fee merchants pay to accept the Amex card is typically higher than the fee charged by other card providers. That’s exactly what made the news in the last few weeks. The Supreme Court of the United States agreed to hear a case about the “anti-steering” or nondiscrimination provisions (NDP) of the AmEx merchant agreement. In plain English, it states that merchants who accept American Express aren’t allowed to do anything that would encourage customers to use a competing, presumably cheaper, credit card networks like Visa, MasterCard, or Discover. The Supremes are going to decide if American Express can stop merchants from steering us to cheaper options for them!
Conclusion
If you are evaluating a network or software platform, it is easy to get caught up in the “free side.” And while it is critical to understand this side, it is even more critical to ask tough questions about the money side. In many cases, the free side precedes the “money side”, and the platform wants you to trust that the money side will follow. The money side often does, but at what cost, what price, and what renewal rate?
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