The Democratization of the Platform Economy — Rethinking ROI (6/6)

Infrastructural parameters determine the logic according to which business models are designed. If the infrastructure undergoes changes, business models must adapt accordingly. For instance, the internet was a driver that caused business model disruption. Today, DLTs/blockchain create new rules, which will lead to entirely new business model paradigms. Such a business model paradigm shift can be observed at Share&Charge, where it led to the spin-off from innogy.

By Nicolas Gilgen & Kilian Schmück

Over the past few months, the Institute of Technology Management at the University of St.Gallen (ITEM-HSG) in collaboration with the Share&Charge Foundation have offered an overview of ITEM-HSG’s Decentralized Platform Framework by applying it to Share&Charge’s platform for a decentralized network of EV charging stations. Although there are more and more established companies experimenting with DLTs (e.g. Facebook’s cryptocurrency Libra and Lufthansa’s investment in Winding Tree), the technologies are still far from mainstream application. A possible reason for this is that when corporates are involved in DLT projects, it is not uncommon to see a clash of two completely different business model perspectives. For corporates, it is the dominant logic to only invest in projects that are expected to yield a positive ROI and, as intermediaries, to take advantage of network and lock-in effects. However, DLT projects try to fundamentally change this logic by creating a platform that is a) eventually owned by the whole network rather than just one single entity and b) directly connects the network participants with one another and thus essentially eliminates the intermediary. The result: no single, dominant entity capitalizes on the platform economics by charging up to 28.5 percent transaction fees — as it is for instance the case for Uber in Berlin. Instead, transaction fees are redistributed to the truly value adding network participants, such as the drivers themselves. However, with the platform being owned by no one, corporates struggle to identify the revenue streams leading to the desired ROI. Why should they make a considerable investment in open source infrastructure if its utilization generates no revenues? This article discusses this question — and offers potential answers — by having a closer look at Share&Charge’s journey from being a portfolio company of innogy SE (henceforth innogy) to eventually establishing the Share&Charge Foundation as well as the eMobilify GmbH (henceforth eMobilify).

MotionWerk GmbH (henceforth MotionWerk), the predecessor of the Share&Charge Foundation, started off as a portfolio company of innogy, a subsidiary of the DAX30 company RWE AG. In fact, one of the company’s first products/use cases was called Share&Charge. Share&Charge was meant to become the (decentralized) Airbnb for charging stations. Charging station owners could connect their station to Share&Charge’s marketplace and provide charging services to EV drivers. For the provision of this marketplace on its platform, Share&Charge would receive a transaction fee. What you are probably thinking now is right: this sounds suspiciously like a centralized platform owned by a single platform owner. While it is normal for owners of centralized platforms to capitalize on their investments by charging high transaction fees, it contradicts the very idea of decentralization. The true value of a decentralized platforms lies precisely in the platform not having a central platform owner. The enablers for this are DLTs. Hence, the technology is just a means to an end. However, as soon as it becomes the end itself, it immediately loses its raison d’être, as seen with Share&Charge. The platform was eventually launched on Ethereum’s public blockchain, but the team quickly realized that in the way the platform was designed, there was no real need for a blockchain in the first place. For instance, while blockchain could potentially offer efficiency gains in payments (as long as they are not processed on a public chain), the technology is not suitable for starting and stopping charging processes. Moreover, with there being an intermediary charging a 15 percent transaction fee consistent to the prevailing platform logic, the platform could have run more easily on conventional protocols and databases. Eventually, the technology/market fit lacked, and the project had to be terminated. Although suffering a defeat with Share&Charge, the project did help MotionWerk to gain visibility in the industry by being the first company worldwide to launch a product approved by regulators on a blockchain. Nevertheless, MotionWerk faced its first major decision: should it stick to the idea of creating the Airbnb for EV charging stations but choose a centralized approach or should it continue to focus on using DLTs to solve the issue of interoperability between charging stations and mobility providers but change its business model? The team eventually decided on the latter. However, if the company were to build a fully decentralized platform and waive transaction fees, how would it eventually make money? After funding became tight in mid 2018, MotionWerk decided on conducting an Initial Coin Offering (ICO). Since 2017, ICOs have been the preferred source of initial funding for many DLT-based projects — not least because of a fundamental lack of regulation. On the fringes of legality, ICOs enabled startups that often consisted of not much more than an idea to raise immense amounts of money within only a few months.

Revenue source I: ICOs and VC investments

For DLT projects, the ICO was often the dominant source of funding and hence a major incentive for the entrepreneurs to launch the project in the first place. However, not only was MotionWerk as a GmbH not the ideal vehicle to conduct an ICO but many of MotionWerk’s partners also started to feel uneasy about innogy’s majority ownership of MotionWerk. Together with the innogy Innovation Hub, the team decided it was time to rethink the corporate structure of the company altogether, and after careful consideration, the Share&Charge Foundation was established in Zug, Switzerland. The Foundation is the ideal vehicle for an upcoming ICO because of two reasons. First, the legal structure of a Swiss foundation guarantees that its funds are earmarked for the development of the project. Second, and in addition of having a favorable fiscal framework for foundations, the canton of Zug created a clear regulatory environment for ICOs early on. In showing great initiative, courage and innovative energy, innogy supported the establishment of the Share&Charge Foundation and transferred all its patents to the Foundation in the hope to eventually profit from the ICO’s proceeds (as contractually agreed on) as well as from a change in the competitive dynamics in the industry. That is, should the open charging network succeed, innogy will profit from the elimination of interdependencies between the company and intermediaries. It is the same reason why Lufthansa for instance invested in the blockchain-based open source travel ecosystem Winding Tree. Through Winding Tree, intermediaries such as Amadeus would eventually be eliminated — and with them their influence on airlines. Additionally, at least some part of the intermediaries’ transaction fees would flow back to Lufthansa as a truly value adding entity. In other words, investing in decentralized platforms as a corporate makes sense if there is a core business that profits from the subsequent disintermediation. The benefits can be twofold: an increase in revenues and/or a decrease in the dependency on intermediaries.

However, the DLT industry is still young and times change quickly. By the time the Foundation was ready to launch the ICO process, the market was hit by its first recession. For a long time, it seemed like the ICO hype was over, and although the market currently seems to recover, the team started to question the added value of a token. How does a token improve our product? Is it really more than just a fundraising mechanism?

Revenue source II: product and services built on top of open source infrastructure

Stemming a whole ecosystem alone is an impossible task. Realizing this, Tesla announced in 2014 that it would open-source its patents. For the company to be successful, it not only relied on the quality of its own products but also on the whole ecosystem around. For instance, people will refrain from buying Teslas if there is no EV charging station network in place. Through the open-sourcing of its patents, Tesla hence tried to encourage other OEMs and ecosystem participants to also invest in EV technology and infrastructure. Similarly, the Share&Charge Foundation’s goal is to first create an underlying infrastructure for Electric Vehicle Charging use cases and an ecosystem for which for-profit companies then provide services. This leads to a new paradigm that is counterintuitive for many for-profit organizations: invest first in public infrastructure that yields no direct return, to create a standard and only then earn money with products and services built on top of it. Dietrich Sümmermann, CEO of eMobilify and Chairman of the Board of the Share&Charge Foundation, phrased this as follows: “We see the Foundation as an investment in the future to bring our vision to life”. In order to do this, the Foundation main activities consist of community building and engagement through its membership model. Against a small membership fee, companies can participate in partner events, benefit from research results and receive support in the implementation of the open source code. More precisely, the Open Charging Network (OCN) is built with tools by the Foundation such as a decentralized message bus in combination with a peer-to-peer charging protocol (OCPI)as well as a smart contract with registry, payment, settlement and agreement logic. Based on the OCN, eMobilify then builds proprietary software solutions which offer the ecosystem a Plug&Play experience. That is, eMobilify takes the open source code, turns it into a coherent software with a front end and builds bridges that connect to the customers’ own IT systems — essentially offering them more convenience in implementing the OCN. However, there are several challenges to this approach: on the one hand, it is promising to offer companies with the Plug&Play solution an easy, convenient and superior way to integrate the OCN into their infrastructure. On the other hand, it does not guarantee the lock-in effect that VCs normally look for. Although it is possible to implement a lock-in through a licensing model, it would also greatly conflict the idea of open source and decentralization. Moreover, offering the Plug&Play solution still has to prove itself to be a valid business model on the market. Hence, eMobilify currently mainly relies on the revenues from its consulting services in the area of e-mobility.

Challenge: achieving a change in mindset

While ICOs as well as proprietary software solutions and software consulting all offer valid revenue streams for DLT companies, the underlying concept of first building an open source infrastructure and thus creating a standard and only then capitalizing on it by offering proprietary products and services has first to be fully understood by large corporations. The real issue is not that decentralization entails completely new business models (as software development and consulting has been practiced by companies such as IBM and SAP for decades), but that corporates need to abandon the idea of requiring a directly attributable return for every investment. Corporates should view decentralization not as the loss of control and revenues, but rather as the elimination of interdependencies, the recovery of a closer company-client relationship and the opportunity of offering superior products in a world where differentiating oneself from the competition is getting increasingly difficult.

This is a multi-part post. Links to the other parts can be found below:

• Part 1: Introduction
• Part 2: Platform Initiation
• Part 3: The Necessity of a Central Marketplace
• Part 4: The Supporting Activities of Platform Curation & Marketplace Modulation
• Part 5: Establishment of a Platform Ecosystem
• Part 6: Rethinking ROI (this article)