The New Economy: Small Wins

I’m more passionate about this topic than anything I’ve ever written about. As an eternal optimist I don’t see a world dominated by Google, Amazon, Chase and Walmart…. But rather a new economy where millions of small businesses thrive. Where every person can employ their creative talent in collaboration focused on value creation. A world where capital flows to great ideas across geographic boundaries lifting the stifling poverty of most emerging markets. Continue reading “The New Economy: Small Wins”

“One Click” for Ads

I was hoping to see rollout of a long rumored payment innovation at Facebook. All I can gather is that they must still be in testing.. but the idea is just brilliant.

Facebook has a tremendous advantage over just about every other advertiser.. its consumers log in before use. Facebook is rumored to be in the midst of  integrating payment tokens into advertising. This means when you click on that beautiful North Face Jacket, or those Climbing shoes that the payment instrument (and even the authorization) is integrated. The only thing that the consumer would need to do is confirm shipping address. Wow.. talk about end running the payment specialists.. this is “one click” for ads.

The very idea that there is a “payment specialist” needed between the ad and the seller is going away.. payments are becoming a generic infrastructure services that no one cares about. See Payments in the OS. In this case IDENTITY TRUMPS everything.. if I know who you are.. everything else is just accounting. Someone should go out and write a patent on a similar flow using blockchain.

My guess is that Facebook would be the beta launch for VBV/MSC and the new 3DS 2.0 spec. So not only would this be a great experience, merchants using this would have a liability shift onto the bank and a 20-30bps rate advantage over traditional eCommerce payment acceptance.  (see my blog on Civil War). This flow would hold on both mobile and desktop.

The other implication here is for the banks using TCH token vault.. sure you can vault your own tokens.. but this also means that you must keep up with the fast changing specs in EMVCo and the other users of the specs in MasterPass and Visa Checkout.. doing your own vaulting may mean that consumers can’t do some of this other really cool stuff.

Transformation of Commercial Networks: Unlocking $2T in Value

 18 Feb 2016

I’m in a network state of mind…  We are in the midst of a massive economic transformation and I can’t quite put my finger on it.  What influences how consumers and businesses are organized? What is changing? Who creates value? What new domains, networks and markets are being created? Where is margin flowing to and from? The hypothesis from Paul Graham’s Refragmentation blog has been keeping me awake at nights.

“that all these trends are instances of the same phenomenon. And moreover, that the cause is not some force that’s pulling us apart, but rather the erosion of forces that had been pushing us together.” Refragmentation

Continue reading “Transformation of Commercial Networks: Unlocking $2T in Value”

Changing Economics of Payments

2 Dec 2015

Happy ‘After’ Thanksgiving everyone, I’m coming out of my tryptophan coma and thought I would go for a mental stretch. This is a pretty big topic, and I won’t do it justice. Thanks in advance for your comments and perspective. [Note I’m not naming the titles of my reference blogs and used only URLs.] Continue reading “Changing Economics of Payments”

ChasePay Thoughts (Don’t sell Visa Stock Just Yet)

09 Nov 2015 Updates

  • I did a Morgan Stanley call this week with Smittipon Srethapramote, ChasePay was a central topic. Evidently Chase is positioning this as a way for CPT to gain volume. Value Prop: we will clear ChasePay transactions at 0bps. Given that ChasePay and MCX don’t exist yet it may be a little pre-mature to take a bet against First Data. What is actually happening is that MCX retailers will be switching ChasePay transactions to Chase. So.. CPT may gain a few merchants.. and a little bit of incremental volume.. but it will be at 0bps. Also remember that FD has Citi, BAC and WFC as customers.. and they can do anything that CPT can do.
  • Problems with a merchant switch. The merchant switching on debit is outlined below.. not much issue here given Durbin’s requirement for dual routing. In essence debit can not be treated as PIN debit and routed directly to issuers/retail banks. However there are BIG problems with ChasePay as credit IF IT IS A VISA ACCOUNT.
    • ChasePay as a Credit must be routed through Visa and then to Chase’s ChaseNet. Merchant switching does not appear to be allowed. In other words ChaseNet Credit in an “on us” would only work if MCX merchants moved 100% of volume to ChaseNet.
    • ChasePay at MCX must be an approved card present method (CHIP or NFC). QR code is not an accepted method therefore it would be treated as CNP. Now Chase could set new unique rules on this transaction that would enable them to own the fraud, but they would need to own the acquiring as well. To own the acquiring they need more than just a “switch” from the merchant for ChasePay transactions only.
    • Tokens, VDEP and MDES. Chase is prohibited from discriminating against wallets in the new VDEP/MDES rules. Chase cards will be in ApplePay, SamsungPay and Android Pay. So consumer confusion will abound.. but also the advantages (liability shift, ubiquity, consumer experience) will make ChasePay on MCX hard to gain traction.
    • Creating ChaseNet as a new Visa. The issues above could disappear if Chase was able to create a completely new 3 party network (per section below).  But Chase has many hurdles to cross, as merchants AND CONSUMERS would both have to accept the terms of the new network and forsake the benefits of Visa. Chase is nibbling on the periphery and trying to enable a new semi closed network within an open 4 party one.
    •  Chase can deliver 0 bps payments anytime it wants to with any card it owns today. Issuers have always held this pricing flexibility. Now acquirers will pass on their fees, but this is only 20-30bps.
  • Chase has created a Visa war plan and I don’t understand why. Chase is the only major bank pushing The Clearing House to develop a token facility, they were also a driving force behind Early Warning’s purchase of ClearXChange… which is well positioned to be an EXTRAORDINARY new debit network.

As background, back in 2011 I told Gordon and Todd that they didn’t understand the dynamics of MCX. They believed they would win MCX because of relationships.. my prediction has turned out to be accurate. I said that I went in as Google and offered MCX 0bps payments with a potential of PAYING MCX to take GoogleWallet and MCX still said no . The margin in payments is in the long tail. The driver of ANY INVESTMENT here is in changing consumer behavior OR in delivering services beyond Payment.  Chase certainly has no credibility here. Payments and banking are ENABLERS to commerce.. they are NOT THE CENTER (see blog Tilting the Networks… a MASSIVE Change)

My top questions/unknowns

  1. Will ChasePay Credit be a Visa Card. If not will they acquire both consumers and merchants?
  2. Does chase believe that a ChasePay credit can run on 2 networks at once?
  3. Does Chase believe merchant based switching/LCR is permitted under its Visa Agreement
  4. What volume does Chase believe it will obtain through this product (BEYOND 0bps payments).

 

29Oct

This quarter Chase has been a favorite target of my blog (ex What should JPM do). Coming out of money 2020 it looks like my timing was pretty good. branding nascar

I just don’t get it…. WHY!?

  1. Why would JPM want a consumer to pay through ChasePay in MCX and not use their Visa card?
  2. Why would any consumer want to accept new terms of a new network (ChaseNet) to use their account in new wallet (CurrentC) with another new network (MCX). Why not just use your Visa card?
  3. Why would I want yet another acceptance brand when Visa’s network fee is so incredibly small (5-15 bps). Branding at the POS is beginning to look like a NASCAR

Back in March 2013 I wrote 2 blogs: Visa’s Golden Goose on the Menu, and JPM/V Scenarios… Which one is it? This was only 4 months after Charlie left JPM and took the top job at Visa. Most of you know I’m very high on Visa now (see Tilting the Networks a MASSIVE change).  As I’ve stated before, the story (all pure speculation) is that Chase was furious with Visa in 2011 and either buying discover or moving their entire portfolio to Mastercard or buying Discover. JPM’s BOD found out about this and threw out Saunders/Buse, hired in Charlie and gave JPM everything they wanted in a DFS purchase (thus bi-forcating VisaNet).. hey but what do I know.. (go ask the CFOs of DFS and MA.. ). Visa must feel pretty screwed over here.. after giving JPM everything they wanted, JPM still looks to create their own brand, product and network.

Value of OPEN

JPM looks caught in a “I want to be AMEX” moment… at a time where Amex itself is looking to re-invent. The value of OPEN is huge.. and it is unfathomable that the largest issuer in Visa doesn’t see it. (See Building Networks and Openness)

The funny thing is that JPM’s efforts are only crystalizing other banks to work MORE CLOSELY with Visa. Quote from top 3 issuer “FU*^& Chase, makes me want to work with the existing networks even more…”. Now we know why Visa worked with Citi on Costco and not their “friends” in Columbus. MCX will not allow any network branded cards in their wallet.. and ChasePay certainly gives chase better interchange than ACH.. but do I really want to encourage a new acceptance method that is at a lower cost? I would if I’m facing prospect of 0 fees.. but is JPM really that circumspect on the value and behavior of Visa card use?

For the model of interaction, looks like I was close in estimating what the product would look like

2013

MCX JPM

2015 (post Money 2020)

ChasePay flow

 

Chase Pay? An account with two identities?

chasepay Options

I must admit to total confusion to ChasePay.. Hopefully the community can help in the comments. The only way this can bypass visa (see blog on wrapping) is to have it run under completely new rules. Will a consumer really understand that a single account runs under 2 different rule sets? On my Apple Phone with CurrentC installed what do I use at an MCX merchant that accepts NFC (ex CVS)? Or worse if Chase does indeed allow Chase cards on SamsungPay they have created yet another conflict with MCX (because of MST mag stripe emulation).

Chances of ChasePay Success?

The MODEL above makes complete sense for PayPal, Amex and MCX. To be clear I am very very high on MCX.. but this product? Perhaps Chase cards have a loyalty I just don’t know about. Or there is something missing in my assumptions. There are 3 models of ChasePay Interaction

  1. ChasePay within MCX Wallet
  2. ChasePay within the Chase Mobile App via MCX QR Code Directly (I think this will be prime)
  3. ChasePay presented via NFC/MST (ex Samsung Pay??)

Will Consumers accept new terms for a new product operating in a new wallet with a new network? Is that really innovation? Innovation is NOT ABOUT rewiring your assets, it is about designing a great experience for the consumer.

Sorry for the short blog, spent all my time drawing the pictures.

 

eCommerce Thoughts 2015

29 Sept 2015

Money 2020 in 4 weeks! My session is on Tuesday at 11:35. We are talking data and collaboration. Look forward to seeing all of you.

I’ve been on the hunt for a good article on the impacts to “eCommerce acquiring” from tokenization, new rate tiers, authentication, mobile… and I’m still looking. Payments is a very enigmatic space! Its just hard to believe that top 10 payment players have no idea of what each other are doing. Industry consortiums and utilities are much more political than they are threatening.. as their support at the CEO level and at the operating level are completely different. Example “Real time payments”.. A regulatory driven initiative that no top 10 bank wants to say no to.. but with no business case. So it just plods along on a 10-15 year cycle. Why would anyone in their right mind want to work on this initiative? Particularly when Square, Facebook, Google and Paypal all do real time payments for free through debit networks.. NOW.

As I outlined earlier this year in Structural Changes in Payments, there are 6 key areas that are impacting all payments:

  • Risk and Identity
  • Data/Commerce Value
  • Consumer Behavior/Trust/Acceptance
  • Issuance/Customer Acquisition/HCE
  • Regulatory/Rates/Rules (Fees)
  • Mobile/Payment in the OS

Today’s blog is on how these structural changes, and new solutions, are driving changes within eCommerce (payments). eCommerce is a “lumpy” business with 4 “payment” players managing 70%+ of the $190B in eCommerce transaction volume:

  • Cybersource US $80-100B
  • PayPal + GSI $50-60B
  • Amazon $90B
  • Walmart.com $14B

Obviously adding these figures up shows volume greater than the $190B in eCommerce sales, so a little more detail is necessary (Example I believe Chase Paymentech clears for Amazon, part of WMT and PYPL). What do each of these players do? For example Cybersource nits together acquirers, fraud services and methods of payments. Amazon and GSI layer on Logistics, shipping and website hosting. These are 4 very different companies. There will be some VERY large changes in eCommerce Payments which positively impact merchants, but will be detrimental to pure-play intermediaries. What was a specialized service (fraud mgmt, cards on file, checkout hosting, … etc) is becoming a commodity. Due to the improved ability to authenticate and consumer moves toward mobile.

I was amazed that I couldn’t find any articles that go through eCom intermediary services, and the impending changes that will impact payments in eCommerce. The payments industry is certainly one of the most opaque… not only is there a lack of academic courses on the subject, you can’t find any public articles that articulate what is happening. For example, a logical question for investors: What will impact PayPal US margins in next 3 yrs? How does Cybersource compete against PayPal? How do the services compare? I challenge you to find this in the press.

History

Before I start a discussion of the disruption and margin, I’ll give you my view on the history of eCommerce. The entire founding team of Paypal knows this much better than I do.. but let me attempt to summarize. In mid 90s consumers could buy things on the web.. the challenge was that banks had no way to manage card no present risk and fraud. Paypal and CYBS created CNP risk models. The key change here is that perfect authentication destroys the need for most risk and fraud (exceptions are credit risk and 1st party fraud… like taking your grandmothers card and using it).

Early stage companies don’t have time (or capital) to invest in large payments teams. In the eCommerce world, online stores went to gateway providers, In the mobile world Stripe and Braintree serve this function. What do Gateway’s do?? I would love to see a service matrix for the industry.. but since I couldn’t find one .. here is my list:

Front End

  • Checkout page (hosting)
  • Fraud services
  • Management of cards on file
  • Distribution of merchandise (example GSI)

Back End

  • Acquirer integration
  • Payment acceptance
  • PCI compliance
  • Taxes
  • Receipt

cybersource US

 

 

As small companies grow up their needs change. In phase 0 most start ups can’t afford to create a payments team. As they mature and go global they can’t afford not to. How do I accept multiple currencies? Paypal? Alipay? JCB? Qiwi?… Then there is global cash management, tax, compliance, … AND THE TECHNOLOGY CHANGE.

 

One of the big lessons we learned at 41st Parameter (now part of Experian) was that the market for eCommerce fraud services was very small. The big merchants (Amazon, Walmart, …) created their own tools, as did the big Gateways (Cybersource, Paypal, Digital River, etc) to serve the SMALL MERCHANTS. It was the medium size businesses that were too big to outsource to a specialist, and too small to create their own tools, where there was a market (example Airlines, Banks, Top Retailers, …).

 

eCommerce Service Providers – Long Tail Impacts

 

 

 

Of all the areas of payments, eCommerce is undergoing the most radical transformation. The reasons? All of the structural items listed above AND new entrants.

 

I like PayPal!

 

I am not a paypal hater, however I will continue to poke them for silly moves (like Xoom and Paydiant, and Kingsboro’s POS push). They are well positioned for 25%+ CAGR for years…. But they must change focus back to their core SMBs and “long tail” merchants.

 

Why long tail? Frequent readers of my blog know that roughly 60% of Acquiring profits are generated by the bottom third of the merchant base. Small merchants are where the margins are. If I were CEO of Paypal this is where I would focus my complete attention, as this is where Paypal has excelled (and it is where profitability resides). No one has proven an ability to acquire SMBs at scale other than Paypal in eCommerce.. NO ONE. Most of their competitive threats deal with consumer “Front End” components of the gateway value propositions (ex ApplePay). This does NOT address the merchant side (back end).

 

Paypal is by far the best in class SMB eCommerce Acquirer…. BUT

1) traditional acquirers are beginning to break in as the barriers to entry are disappearing AND

2) front end solutions like Apple Pay/Microsoft One Pay and VPP are coming to market AND

3) consumer behavior mobile shift

4) Payments are costs are moving to 0 and being bundled (ex. Google offering free shipping too)

5) Authentication is killing their core risk management asset

6) Networks are creating a new rate tier and shifting risk to banks for eCom (160 bps and no risk, vs Paypals 375 bps and merchant borne risk)

 

All these are threatening their existing base and growth. However most of these items DO NOT impact Paypal’s merchant acquiring directly. Paypal is a natural alliance partner of: MERCHANTS, CHASE, AMEX, and Private Label. I believe that something will happen here… the issue isn’t financial it is focus/alignment. Paypal is a super efficient on us network, that prices at Amex rates. Chase and Amex have this same strategy. Merchants want payments for free.. hence the challenge in working their directly without some other massive value proposition (see paypal at POS). My recommendation to Paypal is the same as the original founders: Stay focused on long tail merchants… forget about dragon slaying wal-mart… there is no margin at the high end merchants.

 

Networks – Card holder present

 

Tokens in Mobile, will make their way to tokens in browser and create a new form of mobile authentication which will enable payment networks to create a MUCH improved version of VBV/MSC, shifting liability onto the bank with an interchange rate between CNP and CP. Who can take advantage of this rate and liability shift? Entities that can authenticate the consumer on the mobile device (Apple, Google, ?MNOs), securely manage a token and broker identity with other parties (see Authentication in Value Nets).

 

How will Visa/MA roll this out? There are many, many lessons learned in the prior 3DS (VBV/MSC) roll out. Already V/MA have been talking to major issuers and eCommerce service providers. Token issuance is currently a bit of a hang up as the issuers want to get their own TSP services up and running, and the Google/Amazon, … want to run their own TSPs. If everyone would agree to use the V/MA TSP services this could happen quite quickly. But because this is NOT the case, ApplePay and Visa Checkout seem to be the only services positioned for this move.

 

As I outlined in December 2014 mCommerce/eCommerce Converge, there will be a new rate tier: Cardholder present. When? Next 12 months is my guess. What does this mean. Merchants that accept tokens in eCommerce will get a reduction in fees (assuming acquirer/gateway passes on) AND liability will shift onto issuing bank (aka VBV/MSC circa 2006). In the US this means 140-180 bps AND liability shift….

 

As I stated previously in my ApplePay blog, when this new rate tier hits, it will free Apple (and others) to transfer the token to the merchant across a greater number of protocols. In store this means that NFC will compete with a BLE experience, with NFC carrying a CP rate and others carrying a Cardholder present rate (and bank liability) that is very close to the CP rate.

 

I must end here.. I have been working on this silly blog for 4 weeks (part time).

 

Sorry for typos

Collaboration and the “Sharing Economy”: What does that mean?

5 August

As I wrote back in my May blog Internet 3.0 Collaboration in Commerce, Communities and Networks, we are transitioning to a new era of collaboration. The industry buzz word is “sharing economy” but this is a little too altruistic a moniker for my liking.  If an elephant was taken down by 1 million ants there would indeed be sharing… of the carcass!

Indeed the implications of collaboration and reduced Transaction Cost Economics (TCE) are much broader than “sharing”. As Uber demonstrates, existing industries will be taken apart and re-assembled through external orchestrators.  How can companies deal with the “unstructured complexity” of new market based orchestration, open APIs with unstructured requests for their data across thousands of new partners? This is our focus at Commerce Signals.

Market-Hierarchy-Model

I’m currently reading the works of 2 Nobel prize winners in economics: Oliver Williamson (2009) and his mentor Ronald Coase (1991). Both were focused on the factors governing the “nature of a firm”. (particularly Transaction Cost Economics). Here are a few of the books I’m reading (for those interested):

There is no way to summarize the work of 2 Nobel prize winners in a blog, but I would like to focus on one element: Transaction Cost Economics (TCE).

Transaction Cost Economics (TCE) dictates the structure of a company

 

Ronald Coase, used a TCE framework for predicting when certain economic tasks would be performed by firms, and when they would be performed on the market. From this Williamson Paper

Ronald Coase posed the problem more sharply in his classic 1937 paper, “The Nature of the Firm.” He, like others, observed that the production of final goods and services involved a succession of early stage processing and assembly activities. But whereas others took the boundary of the firm as a parameter and examined the efficacy with which markets mediated exchange in intermediate and final goods markets, Coase held that the boundary of the firm was a decision variable for which an economic assessment was needed. What is it that determines when a firm decides to integrate and when instead it relies on the market?

Today, our network, and services, are evolving in a way that supports new mechanics for transacting: Authentication, reputation, coordination, contracts, risk, discovery, trust, …etc. Uber is the best example of this. We all agree that Uber’s success is reallocating the “assets” of production in a more efficient form.

As stated in my blog, the boundaries of [established] organizations will be changing as a result of changes in TCE and common facilities to construct agreements and partner outside of their organization. Modularity is the key technical term describing how business must structure boundaries (specifiability, measureability, predictability). What services do you want to make available? The answer to this question is NOT a technical problem, but a business one. Amazon is one of the clear leaders in modularity. The rules in which modules operate are “platforms” (technically) and “markets” (from a business perspective). After if everyone built their “API” in a different technology with no common directory it would be useless. For those interested, CommerceSignals is this neutral directory, never looking at the data.. but switching it as directed.

Collaboration what does it mean?

I guess it depends on your point of view (the elephant or the ant).  Look at the Google Buy Now Button (see my Blog). Google gets everything I’m saying in this blog (guess they listen well). Google Buy Now is a Partnership Platform (see blog on Google’s Strategy) for advertisers and physical retailers. Local retailer uploads store inventory, google helps them get customers to buy.. and ships the goods to the customer’s door twice a day with an Uber like delivery services (shopping express).  With all of these services Google will be in a position to guarantee sales.. For example if I’m a local specialty retailer Google could propose: I will drive $100k in sales for $1500… This is a MUCH bigger deal than Uber.

Who do you work with? Are you the lead? Are you the follower? Who decides? Who sets the rules? My favorite collaboration story at Commerce Signals is from the Chief Marketing Officer of a National Movie Theater chain. Brent said “Tom I’m the anchor tenant at 500 locations, I’m surrounded by 10-15 restaurants and 20-40 retailers in each of them, when I win they win. It is my community that competes with my competitor’s community, yet I have no facilities for collaboration. My data just falls into the trash can, how can you help us”?

For example every Fortune 100 company wants a “big data team”.  These companies have internal plans based upon internal data driven by internal teams.  While I agree that determining what products and consumers are profitable is a key area for everyone, the REAL VALUE to be unlocked is at the intersection of your data with something else. Afterall what company can compete with Google, Amazon and Facebook in consumer insight!?

One of the MOST SIGNIFICANT developments in last 5 years is that there is now a broad recognition that collaboration is necessary. For example Bank’s spent over $400M (EACH) trying to make CLOs work, MNOs spent $600M trying to make payments work, .. I could go on. Commerce is about markets. Markets are about connections. We are moving from an era where every Fortune 50 built their own closed market (where no one showed up) to a model where at 2 or more work together (Closed to semi open to …??open). The early battle in this shift to collaboration is Google, Amazon and FB (GAF) vs Everyone Else. What ONE COMPANY could possibly compete against GAF?

Collaboration is more than just advertising and demand how do you work with specialists? What parts of your organization are not best in class? When should you have your own internal team, vs an external one? When should you build and when should you buy? Technically we see this dynamic in great companies like Salesforce and Amazon Web Services. Uber and Google Buy Button have given us business led examples.  The challenge for existing enterprises to adapt is tremendous. From a management perspective how do you manage a collection of suppliers vs a hierarchy of employees? If you have challenges managing internal compliance, how do you do it across many external organizations? How do you specify the “unit of work” to be performed and how do you measure it? What is a 1099 employee? In which country/State?

This is where trust, reputation, markets and the strategies of (distributed) modularity come to play.

My Fortune 100 recommendations (from previous blog)

Action plan

1) List out your most valuable consumer insights

2) List your top growth opportunities

3) List the top sources of new revenue from existing customers

4) Where are your greatest threats?

5) What are you not acting on?

6) Who can act on them more effectively?

7) How can you partner one time?

8) How can you enable 100 companies to run with the opportunity?

9) What needs to be measured?

If you don’t take action.. the swarm will …

 

Internet 3.0: Collaboration in Commerce, Communities and Networks

26 May 15

This is under revision… pardon the typos..

Exec Summary

  • Consumers, Communities, Markets, Technology and Commerce are undergoing tectonic shifts. Over the last 20 years Companies “enabled a channel” in Internet 1.0 and 2.0. Internet 3.0 will bring about fundamental transformation in organizational structures, products and processes.
  • Internet 3.0 (i3) eliminates traditional competitive barriers (assets intensity, specialized skills, product design, distribution, marketing, brand,… ) enabling new forms of collaboration and asset utilization within a new set of non geographic communities.
  • Swarms of specialized communities are hyper meritocracies which react to serve areas that are: #1 inefficient, #2 opaque (ie wiki leaks, banking, advertising…), #3 poorly serve the consumer or #4 at risk (ie Darwinian). Today we see this dynamic take place in many areas: App Stores, Uber Drivers, MOOCs (College Learning), Wikipedia, Blogs (vs Newspapers), …etc. This may be analogous to the end of the Jurassic period (no more Dinosaurs).
  • The structure of most corporations is at risk (inefficient, opaque, poorly serve consumer, at risk). Information intensity and the ability to manage across internal boundaries and interfaces will be key to future margin (not economies of scale, asset intensity and competitive hurdles).
  • Large companies must reshape organizational boundaries to enable many connections (to source demand and execute) within their processes to create new products and reach an amorphous set of new dynamic communities. The “boundaries” of a company MUST become more open (as they are currently in your marketing and sales sides today).
  • Historically, acquisition and JVs were the approach to boundary growth. The future will see a much more loosely coupled approach to deliver value, one focused around common platforms, standards and networks. Best examples are Microsoft/Intel, and Uber were many independent nodes innovate and connect to successful networks, and each node is in control (with ability to measure and price) its unique value.
  • Regulation (ex Taxi Commissions and CFPB), societal norms, ability to measure value, and Risk management are the environmental factors most influencing boundaries.
  • Modularity is the key technical term describing how business must react to boundaries (specifiability, measureability, predictability). What services do you want to make available? This is NOT a technical problem, but a business one. Amazon is one of the clear leaders in this discipline (ex Legos). The rules in which modules operate are “platforms”. Most platforms have been internal only, with a few exceptions (RosettaNet, Windows/Intel, Java, Commerce Signals, ..etc). Networks are required for platforms to communicate, discover and interact with heterogeneous clusters.  Today the most valuable networks are Visa/MA, Google, Amazon, Markets (NASDAQ/NYSE), Alibaba, eBay, …
  • Most large companies struggle with internal complexity today. Internet 3.0 brings on a whole host of new problems for companies that don’t have a software culture, and have legacy infrastructures which resulted from thousands of small tactical decisions.
  • There are many exciting investment opportunities in this hypothesis. For example, existing networks have a big leg up in constructing new collaborative networks. Their success will be driven by balancing openness/governance with control and value exchange. I’m quite impressed with Visa’s move here (see this week’s press).

Year of Collaboration

I painted 2015 as the year of collaboration in my 2015 Predictions. Why? The structure of most corporations is at risk (inefficient, opaque, poorly serve consumer, at risk). Information intensity and the ability to manage across internal boundaries and interfaces will be key to future margin (not economies of scale, asset intensity and competitive hurdles).

Large companies must reshape organizational boundaries to enable many connections (to source demand and execute) within their processes to create new products and reach an amorphous set of new dynamic communities.  Historically, acquisition and JVs were the approach to boundary growth. The future will see a much more loosely coupled approach to deliver value, one focused around common platforms, standards and networks. Best examples are App Store, Wikipedia, Microsoft/Intel, and Uber were many independent nodes innovate and connect to successful networks, and each node is in control (with ability to measure and price) its unique value.

What are the 2015 drivers of collaboration?

1) Consumer behavior is undergoing a tectonic shifts (mobile, commerce, social interaction, employment, education, reputation, …).

2) Information intensity has outpaced the importance of economies of scale (asset intensity). Both in terms of efficiency (cost) and growth (revenue). Over the last 5 years new networks (mobile, digital communities, Uber, …etc) have destroyed the traditional structures of information creation, curation, distribution and use (ex Universities/MOOCs, Maytag Repair/Youtube DIY, Britanica/Wikipedia, ..). It is NOT ENOUGH to manage your data (ie Big Data), you must find a way to let it work with the environment (ex CommerceSignals). Traditional networks and closed systems are fragmenting (ie Commercial, social, political).

3) Awareness (the Solo Approach has failed). Fortune 50s have each spent over $500M (each) in attempts to build a Google (aka business platform) where everyone works with them. They have now realized that this myopic approach creates magnets of opposing fields. No one company can do build a platform.. platforms REQUIRE collaboration not ownership. Partnerships (closed networks/clusters) are the natural first response to this environmental change. However closed networks are challenged to gain traction in dynamic markets.

4) Google, Amazon, FB and Apple have become powerful Star networks threatening just about everyone (see below). There is a race going on today, some of which I outlined in Banks/Non-Banks and Commerce Networks. Also see Google Creating Platform for Mobile Economy. My NewCo, CommerceSignals is focused on helping everyone else collaborate and compete.

Information Intensity

If information is power.. where is it flowing? If we assume Networks are conduits of information, will mapping networks allow us to map power?

  • 500 years ago information was held in books. Books resided in academia and in monasteries. Networks were largely structured in relationships and affiliations (which were highly geographical).
  • 100 years ago public information (books) moved into public libraries, and commercial information (designs and processes) was held within commercial enterprises. Networks expanded in geographical scope (reach), specialization (scope) but transaction depth and information organization did not change. Power largely resided with the creators of information and distributors of information.
  • 20 years ago – Democratization of Data (access/structuring). Public information moved online and became dynamic (Wikipedia) while private information became organized within any given commercial enterprise (ie ERP/Big data). Information organization and access exponentially expanded (mobile, internet, google, broadband…etc), new specialized networks formed with many new specialists (stores, outsourcing, design, hosted services, …). Power began to shift to individuals, virtual access points for information, and new communities.
  • 5-10 years ago – New networks facilitated new connected communities (social, educational, business, ..etc). Expertise and content creation shifted from traditional geographically based entities into loosely structured global communities of experts. Time spent in community increased, as depth of information increased, and tools for dissemination improved (MOOCs, Youtube DIY, ISIS Propoganda, …). Consumer behavior shifted massively to new channels and communities. Private commercial data became actionable through new private networks (ex supply chain, advertising, …etc). Power shifted to communities and orchestrators of (public) small world information (Google, FB, Amazon, Apple, …). Risk and Reputation expanded beyond closed networks and new companies (ex Uber, Airbnb) leveraged information to connect existing (small) assets to consumers in new communities and commercial processes.

Information in isolation delivers little value, particularly if you are the only entity that can act on your insight.  How many assets (and insights) do you have within your company that are discarded or underleveraged?

Internet 3.0 and Boundaries

Internet 3.0 (i3) eliminates traditional competitive barriers (assets intensity, specialized skills, product design, distribution, marketing, brand,…  ) enabling new forms of collaboration and asset utilization within a new set of virtual communities. Swarms of specialized communities are hyper meritocracies which react to serve areas that are: #1 inefficient, #2 opaque (ie wiki leaks, banking, advertising…), #3 poorly serve the consumer or #4 at risk (ie Darwinian).

Today we see this dynamic take place in many areas: App Stores, Uber Drivers,  MOOCs (College Learning), Wikipedia, Blogs (vs Newspapers), …etc. This may be analogous to the end of the Jurassic period (no more Dinosaurs).  The structure of most corporations is at risk (inefficient, opaque, poorly serve consumer, at risk).

Information intensity and the ability to manage across internal boundaries and interfaces will be key to future margin (not economies of scale, asset intensity and competitive hurdles). Large companies must enable many connections to source demand and execute  within their supply chain to reach an amorphous set of new dynamic communities.  The “boundaries” of a company MUST become more open (as they are currently in your marketing and sales sides today).

Boundaries and Collaboration ARE NOT a Technology Thing; It is a business thing.

Example – Uber

What makes Uber so successful? It created an effective market for existing assets, with an infrastructure to manage it. I see the core services in Uber’s network as:

  • Risk/Trust (driver vetting, insurance, reputation, insurance, reporting)
  • Quality of Service (Time to Pick up, Routing, Availability, Payment)
  • Consistent Rules/Terms
  • Cost to Connect (Customer Acquisition/Registration, Driver Registration, ..)
  • Value Added Services

What other areas of the economy have inadequate markets? Amazon started with books and leveraged to become the starting point for product search and reputation. Traditional university education is being threatened by Massive Online Open Courses (MOOCs), retail banking and prepaid cards, …etc

Platforms vs Networks vs Markets

Is Google a Platform or a Network? Visa? Verizon? All of these terms are over loaded and used too frequently. But there are very important elements loaded in here, with very large economic implications, thus worthy of discussion.

 

Platform Network Market
Technology Terms High Medium Low
Business Terms Poorly Defined Well Defined Well Defined
Investment Risk High Medium Low
Rule Making Closed Closed/Open Open
Number of Services +++ ++ +
Compliance Loose Rigid Rigid
Pricing Undefined Defined Bid/Ask
Control 1-3 Leaders Owner Members

Markets are defined by pricing (ie Supply/Demand) and neutrality. Networks typically have defined participants, value/services and pricing (payment acceptance, transportation, call routing). Platforms are largely technology constructs where collaboration may occur, but business terms are ill defined (example Microsoft and Intel). I discussed platforms in last year’s iPhone 6 blog, my favorite Platform book is Platform Leadership: How Intel, Microsoft and Cisco Drive Industry Innovation. The authors outlined 4 Levers of Platform Leadership

  1. Scope of Firm: What is done inside, how they encourage outside investment and focus
  2. Product Technology: Architecture, Interfaces, Modularity, What do they expose to partners?
  3. Relationship with Complimentors: Support of Complimentors, acting on ecosystem needs, path to consensus and standardization, profitability
  4. Internal Organization: What is the “core”, and how are resources allocated to core activities vs support for partners.

Networks are common facilities where heterogeneous nodes interact with a defined service(s) and rules. Networks “sticky”

in small world networks, building and maintaining links between network elements requires energy…. [in a world with limited resources] a transition will occur toward a star network [pg 75] where one of a very few mega hubs will dominate the whole system. The star network resembles dictatorships in social networks

Weak Links by Peter Csermely (viewable on Google Books here)

There are hundreds of platforms, millions of markets, yet only a handful of effective commercial (and social) networks. In layman’s terms could you imagine working across 10 different Facebook alternatives? Or installing rail road tracks next to your competitor? This is what the EU hates about Google and Facebook…  It is very hard for a competitor to break into this model.. as these services are already free (and open).

Networks are much more rare, they enable collaboration and unlock economic value. My top investment hypothesis: find networks where thousands of participants invest billions of dollars to make work (Visa, Mastercard, Nasdaq, Uber, Apple App Store, … ). Companies like Uber and Airbnb demonstrate how new networks can form to tackle inefficiency. It is only a matter of time before the swarm comes after your business. How do you react? Collaboration may be a good first step.

Can you “pivot” to a Software Company?

This is not just about “how we work with young innovative companies”, it is about your boundaries. How does a large company act more like a software company? See my blog on Braintree.  My favorite example today is Visa – See Forbes

“We’re telling [developers], ‘Please dream, please build new applications,’ ” says Taneja.

Don’t roll your eyes… Visa has great potential here. Certainly one of the World’s best networks (with much room to grow). After all, it is much easier for an existing network to expand services than an individual node

First a little “Buzz Worthy: background: Internet 1.0 was the static internet (indexing of publicly available information). Internet 2.0 was about user generated content, interoperability, transactions. Internet 3.0….

  • Value Orchestration and Partnerships (OK I planted this one)
  • Connective Intelligence
  • Internet of Things (IOT)
  • Mobilization of Everything
  • Big Data
  • Sharing Economy (Uber)
  • Shift to Hyperlocal
  • Innovation (sick of this one)
  • Trust/Reputation Portability
  • Remaking of businesses (not a web front end to the one that existed 50 yrs ago)

In Internet 1.0 and 2.0 companies treated the internet as a channel, business impacts were around getting your internal stuff into this new place: advertising (targeting consumers), consumer information (ex price transparency, reputation) and local fulfillment (online payments, shipping). The channel was new, and competition changed, yet businesses still created the same products, and didn’t substantially change internal operations.

The impact to businesses/economies from Internet 3.0 will be much more pervasive. How big? Answer these questions:

  • How much more efficient has your organization become in last 20 years (ex: net margin)?addon architecture
  • How long does it take your company to launch a major new product?
  • How long does it take your company to create a new partnership (with shared economics)?
  • How has your company’s core value proposition to consumers changed?
  • How long did it take your company to complete a major technology project?

No Design

Opening up your organization is not easy. Most Fortune 50s have system architectures that resemble this unique structure.  No one starts out with a design like this, it is rather a result of a 1000 tactical decisions, acquisitions, one off projects, and evolving technologies. This is not solely the fault of your CIOs, as technology is strategic area where strategic discussion and decision making is most deficient. What other area has so little discussion from lines of business? CEOs see a vision of what they want, but the ability to evolve is hampered by the high cost of reconstruction and inability to create a consensus design across the organization.

One of my favorite personal stories here was from my time as Senior Director or Oracle’s Global Solution Architecture Practice in 2001.  We met with the new CIO of Motorola where he asked our help in consolidating 124 different ERP systems into one (118 or them were Oracle). His quote “It may be our fault for letting you sell us your software 118 times, but you must share in the burden of helping me clean this up”.

Little wonder “big data” is popular, as gaining insight into the internal mess you have is just the first step of realizing where your customers are and how they interact with you. Most of you know JPM is building a Data Division, one driver is Jamie’s view that Banks have better data than Google. As a former banker I can tell you just getting a report on my customers across products and countries within the bank is a major accomplishment! The idea that I can also manage external data for millions of companies and billions of consumers is ludicrous.. and then deliver on a VALUE proposition to consumers I touch once a month is just plain silly (and myopic). Commerce value is unlocked by working with consumers, merchants and manufacturers.. Commerce is interaction. So how are you improving your interaction!?

One of the obvious challenges of opening up your organization is opening up the ugliness of your infrastructure. For example, FirstData created the OfferWise API a few years ago. Unfortunately this API only worked for merchants that were on its IBM mainframe (not it’s 3 other systems). Similarly its new Clover API is one of the best in the business, yet it only works on the Clover platform. As an advertising partner.. how are you to know what to develop on?beautiful house

Google, Facebook, Apple and Amazon have huge advantages in design as they operate like software companies run by engineers where design matters. In Amazon for instance, each and every service in the company can be leveraged by any other part of the company. It’s own systems architecture allowed it to create Amazon Web Services (AWS).  Integrating internal heterogeneous systems is hard. Exposing these services externally is even harder.

Another of example involves Google/Citi.

Citi was a launch partner for Google Wallet in 2011 and asked the Google team to freeze software deployment while the card provision application was certified. Google said “what is a freeze”? Citi said “you know stop any changes while we certify”. Google “we operate under continuous integration, changes are pushed out every day… we can’t do that”. Citi “what part can you freeze?” Google “I guess we could freeze our API to you”.  The old and new worlds of software design collided here (waterfall vs. Agile), integration is very complex…

How massive is the complexity? Here is a simple advertising picture… you tell me how card data fits in here. To get around the systems integration complexity, companies have begun the dangerous process of sharing the raw data. In the Datalogix model, 340 odd Retailers give DLX a daily copy of all loyalty card information and SKU level purchase information. If you are a CEO.. do you even know where your data is going? Who has it? What would consumers think? There is a better way (shameless plug call CommerceSignals).

landscape

Back in 1997, while I was at Gartner Group, my good friend Roy Schulte coined the term Service Oriented Architecture (SOA). An evolution of what he had referred to as software through contracts. Central to both of these models are the concepts of modularity (specifiability, predictability, measurability) and abstraction.

Today we have MANY interoperable software technologies.. but we have no way to unlock collective intelligence. One of the core problems here is how do you share value (measure) what any one company provided toward “success”. This is not a “big data” problem.. it is a network and market problem. This is what I’m focused on in Commerce Signals.. but more on that in a few months.

Action Plan

Where should a fortune 50 CEO start? People would make the most sense, but big companies are getting a BAD name. For instance JPM had 600 world class mobile engineers working out of Palo Alto.. and assigned 300 of them to Mortgage compliance.. not something you emphasize in your recruiting.

The US is fortunate to attract the World’s best software talent, and the best people attract the best people. The US amplifies this advantage by giving this world class  talent access to capital (willing to take risk).

Apple, Amazon, Google have all taken very different approaches to creating platforms and operating within networks (see Google Creates Platform for Mobile Economy). Most would agree that Apple is the worst partner, whereas Google partners heavily in areas it controls (search, advertising, ..). Amazon is the only company that has made great strides in creating a platform for 1000s of other businesses (retail store, distribution and AWS).

Common to all three companies is their senior management attention to technology and software. Execs get their fingers dirty in it and hire the best people.. then they LISTEN to their technology people. Google’s problem is that they don’t listen to anyone else. Apple’s problem is that software is a second stepchild to hardware/design.. but I digress.

Action plan

1) List out your most valuable consumer insights

2) List your top growth opportunities

3) List the top sources of new revenue from existing customers

4) Where are your greatest threats?

5) What are you not acting on?

6) Who can act on them more effectively?

7) How can you partner one time?

8) How can you enable 100 companies to run with the opportunity?

9) What needs to be measured?

If you don’t take action.. the swarm will …

 

For my Bank friends – Inventory of Payment Decisions

28 Mar 2015

(a partial inventory for Issuers)

Payments are normally a very sleepy business which changes at a glacial pace. Rule of thumb has been it takes 20 years for anything truly new to develop (Debit Cards, ATM, NFC, …).  All this has changed … as identity, authentication, trust, acceptance, value, regulation, infrastructure, cost of issuance, speed of issuance, consumer mobile preferences, consortiums, standards, bitcoin ..  ALL are shifting rapidly. I covered much of this in my January blog Structural Changes in Payments and 4 years ago in Banks Will Win in Payments! … But Which Ones?. With the top 5 structural changes:

  1. Risk and Identity (Authentication and Authorization)
  2. Data/Commerce Value
  3. Consumer Behavior/Trust/Acceptance
  4. Issuance/Customer Acquisition/HCE
  5. Regulatory/Rates/Rules (Fees)
  6. Mobile/Payment in the OS

payment-value

It’s not just payments that are changing, bank branch footprint and the core deposit account are under threat. Not just pre-paid… companies like TMobile, Wirecard, Vodafone, and even Google are thinking of offering direct deposit and bill pay (See this week’s Recode and Future of Retail Banking: Prepaid?, T-Mobile – Great Move into Banking,  )

branch visits

Before we get into an arcane list of initiatives, let me tell you a few stories on just how bad the situation is.

12 months ago, Chase shows up at Amazon to present their new secret creation: ChaseWallet. The Amazon guys didn’t know before hand what JPM wanted to talk about…. On hearing the opening of the JPM pitch Amazon thinks its some kind of joke (…. listening for the punch line). But Chase was serious..!! the Amazon team is almost rolling in laughter/pity. As opposed to telling them how silly the idea is (Amazon has a little One Click button with 400M+ consumers registered) they ask how this is different than the initiative that Chase Payment Tech is leading to enroll merchants in One Click.. The Chase Senior Exec (consumer side) is silent.. “I’m not aware of that”. Can you believe that largest bank, shows up at the largest online merchant to pitch an idea for a wallet to the company that invented it!? Sorry Chase, but you deserved that… What was once the nation’s leading payment team is now a bit of a joke in the valley. (Chase went to Google with same idea following week).

Jamie Dimon was quoted saying that Google, Apple, … all want to “eat our lunch” in this metaphor I guess consumers are on the menu. As much as I respect Jamie as the best banker on the planet, he continues to miss the consumer view… we are not owned, we migrate to where value is provided. Rather than working to specialize in delivering value to consumer, Consumer Banks tend to work to build higher walls and create rules which work against the specialization. These walls will become their own jail if they fail to focus on value, knowing your customer and specialized risk management.

A flip side story.. ApplePay was a closely held secret (other than my blog). Apple only allowed 9 companies into the tent: 5 Banks, FirstData (and Star), Visa, MA, Amex. Within those companies employees had to sign a strict confidentiality agreement and only 5-15 employees could be made aware (within issuers).  I was with 20 of the bank fraud heads 20 days after launch of ApplePay, the guys were telling me how bad the binding process (enrollment fraud) was going to be. Apple wouldn’t respond to banks, networks or anyone.. not by phone, mail. It was a take it or leave it.  Thank goodness for Money2020.. helped get bank fraud guys together with Apple Product.. but the path for collaboration was just abysmal (Apple’s fault)

Inventory of Payment Decisions (Bank Issuer)

  • Bank/IssuerDebit Card
    • Credit Card
    • Debit Card
    • ATM
    • EMV
      • Creditpayments pyramid
      • Debit
      • ATM
    • Tokens
    • Token Vaulting
    • PIN
    • ACH/Wire
    • Check
    • Cash
    • Private Label
    • Pre-paid
    • Private Label
    • Bit Coin
    • Networks
      • Credit
      • Debit
      • ATM/PIN Debit
      • ACH
      • FED
      • SWIFT
      • FRB
      • CHIPS
    • Network Services
      • Tokens
      • Cross Border
      • Pricing
      • Money Transfer
      • Rules/Rule Changes
      • CNP Liability Shift
      • Virtual Card
      • Digital Wallets
      • Alerts
      • Debit Processing
      • Offers
      • Loyalty
      • Redemption
    • Digital Wallets
      • Card Provisioning
      • Partners
      • Apple
      • Google
      • Samsung
    • Infrastructure
      • Card Issuance
      • Measurement
      • Fraud
      • Authorization
      • AuthenticationPayments Council
      • Billing
      • Call Center
    • Partners/Vendors
      • Processing
      • Loyalty
      • Networks
    • Consortiums
      • ClearxChange
      • Early Warning
      • The Clearing House
      • NACHA
      • ABA
      • FSTC
      • ??
    • Regulatory
      • Fed
      • OCC
      • DOJ
      • FTC
      • Policy
      • Fincen
    • New Initiatives
      • Data
      • Offers
      • Fed Faster Payments
      • NACHA
      • Clearxchange
      • Tokenization
    • Standards
      • emvco
      • ISO
      • Open/Android
      • …etc
    • Structure and Organizational

What is a Bank to do?

How do you Prioritize or Organize in this Chaos?

Step 1 – Admit you have a problem!  Then find people that know about it. Look around your organization and find the 5 people that can give an informed view of 50% of the above.  If you don’t have them.. you should go get them.

Step 2 – Create Structure. Where Bank enterprise payment strategy is discussed, with a senior exec champion.  You need some young payment techies and some old hands in the mix. My blog Need for Bank Payment Counsils provided an overview of the structure and objectives of such an org.  CEO should be involved to show importance.

Step 3 – Assess your situation

1) Where is your Revenue today?

2) How do you deliver value in top 5?

3) What are your core Assets? How competitive?

4) What revenue is most at risk?

5) Is there a clear path to win or uncertain future?

Step 4 – Prioritize and create a plan of Action

Step 5 – Assess Partnerships and Assess Impacts. Payments is a networked business. No one can go it alone for long (message to JPM).

Step 6 – Act Quickly. Both Strategically and Opportunistically.

Step 7 – Measure and Adjust. We are moving from 20 year cycles to 12 months. Banks have not run this way before. They must find a way of adapting to the environment.

Google Creating Platform for a New Mobile ECONOMY

16 March 2015

How can Google, Samsung or anyone else ever hope to catch Apple? It depends on what they are chasing!

My view is that Google has just begun a major transformation to the physical (offline) world with Android as the key enabling “platform” (beyond search to orchestration) for a new business network. This transformation involves 5 primary vectors:

  1. Enable Android as the secure platform (SE Linux, Trustzone)
  2. Create participant incentives for commerce “network” to invest and transact on “platform” (Advertiser, MNO, Bank, Retailer, …)
  3. Improve physical world insight/data collection to enhance targeting and attribution
  4. Capture and manage consumer identity
  5. Create/enhance consumer engagement platform for commerce

Mobile Industry vs. Mobile Economy

Apple is the #1 company in the world. (A very BIG period). Apple’s position is well earned through focus and hard work. Operating as a  consumer champion that captures a mind numbing 93% of the mobile industry’s profits.  The most obvious question to address in this blog: what could ANYONE do to dent this? (operating from a basis of under 7%). In other words, what could Google do that would possibly matter?

Answer: The “Mobile industry” is not what Google is chasing (nor are Amazon, FB, Twitter, …). “Industry” is an old world classification that does not account for most aspects of the MOBILE ECONOMY (advertising, beacons, shopping, shipping, social, payment, identity, …etc). The mobile economy is about commerce. Perhaps my favorite “stat of the year” to exemplify the impact of mobile outside of the traditional “industry” came from January in Tech Crunch. Amazon’s business has shifted from 5% mobile to 60% mobile in 5 years!! (see Convergence Blog for more detail).star network

As mobile and IOT encompass ever larger roles/touches which impact our behavior, Google is moving to support both: Android as the embedded OS (connected everything) and Google core as the center of commerce (the orchestrator).  This blog focuses on mobile commerce and I will try to outline a few of Google’s strategic moves that are redefining the mobile economy.

Google’s core is centered on connecting businesses  and consumers, delivering services to all.  At the center of this star network is the indisputable “data” utility which becomes more efficient with every insight they gain on both sides (consumer and merchant).  Today millions of businesses and billions of consumers are investing “energy” to connect to Google (all with unique incentives)

Businesses, Banks and Consumers are all wondering if the beautiful simplicity of Google’s bright shining star [network] is a Faustian Bargain, much worse than Apple’s walled garden. Google’s position today is quite a feat given its humble beginnings as a free Open Source mobile OS that Google bought in 2005.

How is Google building platform and network? Moving to a model of shared incentives and partnerships?  Before we go deep here, let me first attempt to paint the picture of Apple’s dominance (and weakness).

Apple

Apple’s success is completely driven by the consumer, logically this means their organization and investment are focused on delivering great consumer products which operate within a giant walled garden. This walled garden works well in a small world (individual’s control: telephone, music, calendar, pictures) where Apple can control, but not very well in coordinating interactions outside of the garden. Stated differently, Apple’s approach of “my way or nothing”, means it has few friends.

As I outlined 2015 Predictions blog, competition is no longer about camera resolution, storage, and screen size, that enable you to manage items in your small world.  The visible (obvious) attributes of mobile competition have become a commodity; as well as the small world problems that your phone solves.  My view is  Apple’s greatest assets are consumer trust and its unique ability to change consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). These assets allow Apple to assume a leading role in connecting and orchestrating consumers in the real “connected” world , however they are 5 years behind Google, Amazon and Facebook in their ability to execute here.

Why is Apple falling down in IOT/Connected Commerce? Apple has 4 primary strategic weaknesses: 1) it does not partner well (closed network and proprietary standards) and 2) it relies primarily on hardware for revenue, 3) its entire organizational culture and focus is on hardware 4) it locks consumers into its walled garden. Today pointing out these weaknesses is like telling Peyton Manning that his singing was out of tune, or Albert Einstein’s flaw as dancing. These shortcomings just don’t matter in a world where Apple is 3 years ahead of everyone else in profitability, quality, loyalty, integrated OS and Hardware.

Apple’s business model is perhaps the best example of how closed networks win through the domination of a benevolent “channel master” (see iPhone 6 – Apple’s Strategic Opportunity). Cisco, Microsoft, Intel all operate in this model. Apple’s star network is much smaller (ie connected business) but its bonds are much stronger. However, their success may become a hindrance.. as merchants, banks and others want to “own the consumer” too.

Compared to Apple, Google’s world is much more democratic, it wins by delivering value through customer choice every day (search, maps, mail, play, HCE, …).  Google is a commerce enabling, which tilts toward the consumer (on the phone) and toward the merchant (in advertising). Where Apple has a walled garden; Google is a semi open platform that supports many gardens and clusters.  Where Apple’s business is driven by hardware margin; Google’s is driven by daily consumer and merchant choice. Where Apple delivers value to consumers and itself; Google delivers value to every merchant, bank, MNO and almost every consumer (even on iOS). What other businesses are enablers of consumer and merchant? My list is fairly small…

Apple’s inability to make the iPhone work outside their garden, means that they are dependent upon device only margin (currently a fantastic business model). Critics will point out that Apple runs a fantastically successful App Store Platform that is 8x-20x more profitable than Google’s (with less than one quarter of the handsets).  However this is Apple’s walled garden.. where Apple made 30% from $2B from App store sales benefiting 500k odd top app developers, Google’s US Ad sales last year were $30B driving at least 20% of $185B in US eCommerce Sales. Google’s role was much more impactful to the overall economy (and almost all businesses).

Platform is turning out to be an opportunity lost for Apple. The iPhone 6’s security has made it the first “convergence device” with the ability to broker interaction in virtual world and the physical world (NSA, CIA and everyone else are still working to break industrial grade security). Yet Apple has no plan to leverage this identity management outside of their platform (see Brokering Identity), or even use basic identity information to assist banks with identifying ApplePay fraud (until very recently).

How to combine assets in the new Mobile Economy?

We need collaboration! The last 10 years has seen every major fortune 100 build big data facilities that work with nothing else. Banks, MNOs and others have all invested billions in an attempt to build an advertising business to rival Google’s. JPM Chase has a new data division on par with the investment bank, Verizon has built PMI, Walmart has WMX. All are constrained by their partial views of the consumer. Advertisers are challenged to work within these new proprietary efforts. The market need surrounds incremental insight engaging consumers in the channel which they prefer .. which means combining data.Data options

US MNOs spent over $600M+ trying to make their NFC play work. As my good friend Osama said at a recent MNO event “in order to create value sometimes we must let go of the assets we treasure most knowing that value is only created when they are combined with the assets and interests of others”.

Google provides a massive closed market (Ad Words) with unsurpassed consumer insight and trust. No company can choose NOT TO participate in Google’s economy, after all advertisers and retailers must go to where consumers are (not where they want them to be). Google operates in discovery, awareness, engagement, selection, sales, delivery and support.

Google is perhaps the only company in the world that is both loved and feared by merchants, banks and consumers. Particularly as their traditional open source, closed market, and “do no evil” approaches become more proprietary and less transparent. Google’s insurmountable advantage is in using data and insights within its own organization, where everyone else must be diligent with sharing (externally).

Today that fear is not well placed. Few understand just how myopic Google’s current data dominance is. While Google knows most about you online (search, mail, maps), they know very little about you in the real world. Google indexed the internet to create a common directory of public data, yet it has very little insight into private data (even your actual identity).  Facebook, Apple and Amazon all have far greater consumer identity insight.  Physical world (off line) data is of far greater value than online data, and online eCommerce sales are only $185B (US) comparted to $2.4T in offline Commerce.

Google

Perhaps it’s easiest to start this section by outlining what has changed in the last 12-18 months?Google economics

As stated in intro paragraph, I believe Google has begun a major transformation to the physical (offline) world with Android as the key enabling “platform” (beyond search to orchestration) for a new business network. This transformation involves 5 primary vectors:

  1. Enable Android as the secure platform (SE Linux, Trustzone)
  2. Create participant incentives for commerce “network” to invest and transact on “platform” (Advertiser, MNO, Bank, Retailer, …)
  3. Improve offline insight/data collection to enhance targeting and attribution
  4. Capture and manage consumer identity
  5. Create/enhance customer engagement platform for commerce

Android as Secure Platform

Android is transition from open source Linux to SE Linux (which was oddly enough created by the NSA).  One of Androids major shortcomings was its dependency on OEMs (minimal say on hardware). While Apple worked to create innovations like touch ID that is stored within the secure enclave within the A7/A8, Google had to work with prime OEM vendors like ARM to build the equivalent (both Apple Secure Enclave and Google’s new equiv are based upon ARM’s Trustzone/TEE).  Android is making big bets in security, as managing information (and authenticating consumer) is key to orchestration (see  Authentication – A Core Battle for Monetizing Mobile).

Poor SamsungPay. These guys obviously don’t read my blog or they would have clearly seen the implications of Google’s new MNO deal. SamsungPay will not be pre-loaded onto Samsung’s own phone. Samsung not only lost in payments, but also in owning a proprietary security construct that secured the token (Samsung’s proprietary Arm TrustZone implementation). Even if a consumer loaded SamsungPay onto their phone, it will not work without Samsung leveraging the new Google/ARM firmware for secure credential management.

Apple’s biggest lead (with no apparent threat) is in touch ID. While SE Linux and Secure Storage are important… you must know WHO is coming in the front door. The Android approach seems to be more about behavior and forensic identification than biometric.

Incentives for participation

In 2011, the US carriers wanted an estimated $3B from Google for the “rights” to NFC (and the secure element). Google correctly responded.. “how about we figure this out together and see if we can make it work” (skin in the game approach). Last month we saw Google’s purchase of ISIS/Softcard for $60M with a new strategic partnership, with unknown revenue share, and unknown mandatory Android features (ie Wallet/Play/ ?) with the Carriers that redefines the “secure” standard of a new Android platform.

Whereas Apple has complete control over every aspect of iOS. Google has created a network for revenue/sales. Retailers advertise/engage/create, MNOs rev share, Banks manage payments.  You can only guess which platform Banks and MNOs would prefer to invest. This common platform may be a turning point for collaboration and Commerce 3.0 (my year of partnerships).

Offline insight

Google’s mission is to use the phone to cross the chasm into offline. The reason a new platform is needed has to do with offline data. For example, Mobile advertising will never work without an understanding of intent and behavior. This [private] information is locked up in millions of businesses (with a copy at the NSA).  data evolution

Today’s data business is just insane. Take a look at someone like CVS, Catalina is one of my favorite data companies (along with ADS), and Catalina works well with Nielsen to target and measure television ads. However they don’t work well digitally, thus CVS has to provide Datalogix (now Oracle) will all of it loyalty data (your SKU level purchase data) to play with Facebook (see my blog for background). Can you imagine having all of your data in multiple locations? Trusting these aggregators use it appropriately? Combining is with their proprietary models and other external data sets? What are they “gleening” from this data?

Google’s approach is to own the data and insights created from their services. Google now wants to create mechanisms to “share”.. the problem is that this “sharing” involves giving data to Google and getting customers back. This allows Google to create great experiences, but the price for data owners is loss of control.

Logically, nothing in biology or in capital markets has this amount of centralization. The title of this section is “combining assets”, is the only answer to combine assets giving them to someone else for unstructured use? This is what my NewCo Commerce Signals does: providing the plumbing for federated data where data owners retain the control over their data, determining not only who they should share data with, but also for what use (next blog). I’m fortunate to have a few big retailers, banks and MNOs that share this view (within Commerce Signals).

Capture Consumer Identity

Remember when you purchased that new iPhone? You couldn’t activate it until you created an iTunes account. That iTunes account required a credit card. What a brilliant Apple move!!  This year Google will finally catch up, as I believe a key facit of new MNO agreements is to make the Google Play account mandatory (with CCN/Token).

Knowing the identity of the consumer is important, authenticating them is quite a bit more difficult.  I believe third parties like Payfone will play a leading roll here. Payfone is jointly owned by top 6 US Banks, Amex, Verizon, RRE and a few other investors. They are tying together identity information of carriers, banks and platforms to score transactions and enrollment.

Customer Engagement

Google has many, many efforts here:

Retailers and Banks are loathe to give Google data, or let them assist directly in consumer engagement. However as long as Consumers choose Google’s services first, Google is in the driver’s seat. Companies that share data more effectively with them will reap greater benefits.

Wrap up

EVERYONE works with Google… it is where consumers are. Consumer behavior on mobile is changing much faster than anyone has anticipated. No one company can ever hope to compete with Google, they are moving fast to reshape the mobile economy.. where consumers spend 3 hr/day.

mobile_vs_tv_1_v1b-1

Android is a much easier platform to make investment. It’s a more predictable standards based environment compared to Apple (ex Sapphire glass or that darn lightening connector), with a strong partnership track record. Google’s democratic nature allows for experimentation. The path toward rewiring commerce is much easier in a Google world.

Having Google at the core of data is not without risks. Companies must work with many parties after all. How do you track the interaction between all of your partners today? Who has your consumer data? What will you share with whom? How can you accelerate trials and tests?

How do you combine your assets to create value in this new future? Without loosing control. This is the problem I am focused on.