Honey, who captured my value ??

"Capturing value" is as familiar a term to MBA's as "raising a bug" is to software engineers. It simply means if and how much is your business is making money out of the service or good it produces and sells to consumers.
For ex., lets say your firm manufactures cars. You create value to your consumer by providing her a means of transport that's going to save her time, make a style statement, etc. You capture the value you generate by getting the consumer pay for the car.
Now lets try to understand what value a car dealer captures. This is important to understand since my today's article is based on a similar concept. The car dealer adds value to the consumer by having a large collection of cars and providing a buyer an aesthetic environment for his customer to make her choice. The dealer captures his value add by charging a premium over the factory cost of the car.

But capturing value in some industries is not as simple as in the above example. This concept is such a menace that it has disrupted entire industries.

One such example is the telecom industry of the late 1990's. Carriers such as AT&T, MCI of that era had built up so much overcapacity (and therefore huge fixed cost) that in order to break-even they had to provide n/w access to smaller resellers at shoestring prices. These resellers consisted of calling-card companies, paid 900 services providers such as phone-in-astrology, etc. The services provided by such firms were so attractive that similar firms mushroomed at an exponential rate all over the US. You might think that this was good news for the bigger carriers. But in reality, it was disaster in the making. It turned out that the modus-operandi of the smaller firms was that they bought large bandwidth from the carriers, provide their services to their clients & go underground before paying usage charges to the carriers. Basically these firms were usurping the value provided the carriers thereby depriving the revenues that the larger carriers had to make. This shook up the entire industry.

MCI, the 2nd largest US carrier was supposed to have had many such customers but the problem was supposed to be so much out of control that the management had slyly buried such bad accounts receivables in the hopes of being acquired by another carrier, thereby having a chance to cash-in on their ESOPs. Ultimately, in '97, after WorldCom formed a $37 billion merger with MCI, the company wrote down $685 million worth bad assets (non-paying customers). Finally the company had to declare bankruptcy.

Now let me explain a 2nd version of this value capture problem, that's closer to my heart, prevalent in today's tech industry. It is none other than the Social Networking industry, comprising all the Orkuts, Facebooks & Myspaces. These sites boast of millions of users like you & me and are backed by some of the best venture capitalists. But these companies are struggling to break-even, even after more than a decade of operations. Wonder why? The simple answer is that these companies have failed to capture the value they generate. What value do these firms generate? Breaking down commucation barriers, providing another mode for people to express themselves and many more..

Certainly, these are pretty valuable that anyone might be willing to pay for. But the social n/w firms dug a grave for themselves by training the user to demand these services for free. Since then, the firms have tried various things such as advertising to claim the value, but haven't found critical success in any of them. As my team & I try to realize a strong business model for a social networking startup called VividCampus, this question continues to come back and bite us.