Monthly Archives: February 2011

Do SquareUp’s $$ Square?

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Update 1May

Dorsey just tweeted Square’s numbers. See here on Tech Crunch

Looks like analysis below is directionally accurate, actually a little kind.  TPV moved to $2M on that day (of Tweet).

Note that Square revenue is $59k for the $2M TPV, or 295 bps. Transaction Margin is revenue less Square’s processing expense: issuer fees, processor fees. As listed below, this should translate into net square transaction revenue of $10k (note on my post last night I was wrong.. never post at 2am.. error rate is high).

Dorsey picture shows 9k active customers (merchants) on this particular day, which is again consistent with estimates below. Total Active is probably 3x-4x of this, so average transaction amount is probably around $10-$15.

Funny that Visa bought into Square on the same week that it rolled out new mobile swipe security standards. Visa is highly sensitive to Chase needs, and given Chase’s equity stake here they wanted to show support.

Could Square work out? sure it could.. but it is an intermediary solution at best as it is US only (No EMV), and will compete with new mobile solutions which we will see rolling out by fall.

Original post below

24 Feb 2011

Today’s TechCrunch Article

http://techcrunch.com/2011/02/22/mobile-payments-startup-square-ups-the-ante-drops-transaction-fee-for-businesses/#

Following Square is a Hobby. My alarm bells go off whenever a non-payment team “innovates” in payments. My December blog Square Up Update  estimated that Square had 5-15k users. Today’s TechCrunch says Squares 1Q11 TPV is $40M and that they are “signing up” 100k merchants per month. My guess is that “signing up” means downloading Square on your iPhone.

From this TPV we can derive Square’s revenue and their “active” customer base

Rev = TPV * Transaction Margin

Transaction Margin = Merchant rate less cost of funds = 275bps – 225bps = 50bps

Square 1Q11 Rev = $40M* 50bps = $200,000

Rev lost from eliminating $0.15/tran fee = 0.15* 40M/$10 = $600k

Active Customers (Merchants)

Lets assume that average ticket size is $10 and average square merchant accepts 50 transaction per week (10/day, $6,000/ quarter).  This means that Square has 6.7k active merchants. For other iterations see chart below

Is Square really shipping out 100k doggles every month, while only 6-7k merchants are active? I have no idea, but it cannot be a good thing if they are.. see www.sq-skim.com.

Summary

  • Square’s active merchant numbers are likely to be around 5k-30k
  • Eliminating the $0.15 fee is a very big revenue hit… 1Q Rev looks like $200k now
  • Square’s doggle is still not on the PCI compliance list (see PCI org’s list of approved applications )
  • Just as in any merhant account, settlement funds are held to mitigate risk. Does a small merchant want to wait 60 days for payment and pay 3% for the priviledge of accepting a card? This is not a Square issue, but an industry issue in moving down market into cash replacement.  PayPal solved a real problem (CNP Transactions) for a real community of buyers and sellers that coordinated (eBay).

My guess is that Square sees the light at the end of the tunnel and knows it will not be a pretty collision. Evidently Square is burning through its newly received $27.5M (courtesy of Sequoia and Khosla) to grow the merchant base as fast as possible in hopes of attracting an acquirer. Square’s last round closed on a $240M valuation, assuming trailing revenue of $2.5M on $100M TPV, valuation is 16x revenue. However now that the /transaction fee is eliminated.. we are looking at 75% reduction in revenue and valuation on forward revenue is near 240x.  Believe or not.. OBOPAY was still more highly valued.. In both cases, investors have just doubled down and created valuations driven toward an exit strategy.. not on a sustainable biz plan.

The only entities that would be interested in Square are large card issuers who could unilaterally charge a different interchange rate for their own cards (ex Chase and BAC). But the bank business case for an acquisition would be very tough, as a single bank could only reduce interchange for the cards it controls, resulting in a 10% improvement in transaction margin (at best).  A Visa or MA acquisition would alienate the acquirers and processors. I just don’t see a logical exit for them with anyone. Issuers don’t want to pick winners in this space.. they want broad adoption. If JPM and BAC cut special interchange deals w/ Square then they will be pressed to do the same for PayPal.

eBay’s analyst day conference 2 weeks ago showed how aggressively paypal plans to move in the POS space. PayPal’s Virtual terminal not only lets merchants take cards with NO CARD READER, it has partnered with Verifone to act as an acquirer. Next month, we will see some super applications at APSI conference. One of which will demonstrate the current Nexus S operating as an NFC acquiring terminal. .. You don’t even need the doggle or the “signature”..

OpenNFC – Game Changer

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24 February 2011

Monday I wrote about Apple’s “NFC Twist” and how a multi SE environment impacted MNO’s NFC business case. From Monday (I hate to quote myself.. but it keeps from following the link)

The champion of Multi SE architecture is Inside Contactless (OpenNFC).. a very very smart “Judo” move that leverages NXP’s substantial momentum (in integrated NFC/controller/radio) against itself. Inside’s perspective is that there is no reason for the ISO 14443 radio to ONLY be controlled via NFC (treat it like a camera). Inside’s OpenNFC provides for “easily adaptable hardware abstraction software layer, which accounts for a very small percentage of the total stack code, meaning that the Open NFC software stack can be easily leveraged for different NFC chip hardwalet multiple applications and services access it”. Handset manufactures love this model.. MNOs hate it. As I stated previously, closed systems must develop prior to open systems as investment can only be made where margins and services can be controlled. OpenNFC changes the investment dynamics for MNOs, and provides new incentives for Google/Apple/Microsoft, … to transition their closed systems into NFC platforms.

For Banks, Handset Manufacturer and Startups…

I cannot understate the importance of this approach.  My guess is that Apple, Motorola and RIM are all planning to pursue “OpenNFC” .  Multiple applications can now leverage the 14443 radio IN ADDITION TO the MNO controlled (SWP/SE) environment. Applications can then ride “over the top” independent of carrier controlled (TSM Managed) OTA provisioning.

In business terms, what does this mean? ISIS was founded under the assumption that it controlled the radio and all applications accessing it under NFCs  secure element (SE)  single wire protocol (SWP). Nothing could use the radio unless the ISIS TSM (Gemalto) provisioned it. Visa, Mastercard, Amex were all looking at a future where the BEST they could do was exist as a sticker on the back of the phone. In the OpenNFC model, the radio can be accessed directly through the handset operating system (assuming the OS integrates to the Inside OpenNFC controller).  This provides the ability for applications on Android and iPhone to access the radio. In this model, Mastercard DOES have the ability to get PayPass into the phone. My guess is that one driver of MasterCard’s hiring of Mung-Ki Woo from Orange was his unique perspective on how to make PayPass work within this InsideContactless model.

For ISIS? This is a tremendous impact to their business model. Perhaps something they cannot recover from. MNOs invested tremendous effort in developing NFC, now they are having their legs taken out from under them by a contactless vendor and the handset manufacturers. For ISIS to succeed they must run much faster and expand scope from a narrow payment pilot (over next 18 months) to building a platform that can compete AND interoperate against Android. Yeah.. that big. Their advantage is in control, security and provisioning. Unfortunately, because they have focused on the “control” aspect as the centerpiece of their  business model, they have developed no alliances. In this, ISIS may well follow the failure of Canada’s Enstream. A group that got all of the technology right but failed to develop a sustainable business model.

Start-Ups

Start building to OPEN NFC. Game IS ON. Assume that Android and iPhone will let you access the radio…. For a fee.

For Consumers

CHAOS. What do you do when 5 applications all want to submit your payment.. .or read an RFID.. which one do you use?  For a view on the mess this will cause, see the Stolpan whitepaper. 

I believe this approach benefits Apple much more than Google. Apple’s platform “control” and QA testing will be essential to getting this off the ground. My guess is that Apple will have only ONE NFC payment option.. APPLE PAYMENTS. Perhaps a gatekeeper model where multiple cards can be store but Apple collects a fee.

Although Apple has an advantage in control. Google has the opportunity to deliver a much better value proposition to consumers, businesses and application developers. I’ll stick by my Axiom that new networks must start as closed systems delivering value to at least 2 parties. But can Apple compete with its Gosplan (USSR State Planning) like controls against open Android?

Background

NFC Background for non-techies reading the blog, there have been many, many global pilots of NFC.. but no production rollouts. From my previous blog

What is NFC? Technically it operates on the same ISO/IEC 14443 (18092) protocol as both RFID and MiFare so how is it different? I’m not going to get into the depth of the technology (see Wikipedia), but the biggest driver was  GSMA/NFC Forum’s technical definition (UICC/SWP) that ENABLED CARRIERS to control the smart card (NFC element). This in turn enabled carriers to create a business model through which they could justify investment (See NFC Forum White Paper).

BilltoMobile Case Study for Start Ups

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23 February 2011 

BilltoMobile is a case study in how to innovate and work with 800lb Gorillas. Founder Paul Kim is a genius in the way he structured this thing.. just a brilliant business model that helps the MNOs monetize their network. Boku and Zong skipped a very important step in their evolution: no carrier relationships. BilltoMobile’s success demonstrates how important detailed knowledge (ex Denal’s telecom billing systems) and relationships are in delivering “innovation” within someone else’s network. What makes BilltoMobile such a great model?

  • Integrated into carrier billing systems (significant barrier to entry both in technology and in contractual relationships)
  • MNO value proposition. MNOs take NO RISK in enabling these payments. MNOs take a percentage of merchant fees AND they increase sales of their digital goods.
  • NO CUSTOMER REGISTRATION. I cannot understate the importance of this to both merchants and consumers.. its like a credit card you never knew about
  • Can be used both online and mobile
  • Ability to raise limits payment limits $25/mo
  • Reduces cost structure (now independent of premium SMS rates)

As stated in the CNN Article

BilltoMobile CEO Jim Greenwell says the spate of carrier wins reflects the hard work the company and its majority shareholder, South Korean’s Danal Corp., have done in the carrier billing field. In 2006, BilltoMobile was spun out of Danal, a leader in carrier billing in Asia. The company quietly began approaching U.S. carriers after the spin-out about using carrier billing, but it took a few years before the company could establish its first deal with a major carrier, which it did with Verizon in March of last year. 

…the challenge was to migrate carriers away from premium SMS, which other mobile payment services like Zong and Boku have used in addition to direct carrier billing. The problem with premium SMS was that premium SMS providers often charged 35 percent to 50 percent fees on top of transactions, which made it only good for digital goods. By tying directly into carrier billing systems, BilltoMobile can bring those fees down to the mid-teens

Zong and Boku never attempted to tackle the “hard work” of carrier integration.. they just leveraged and existing Premium SMS services… now they have paid the price. From an investor perspective this is extremely important. Zong and Boku ARE NOT acquisition targets because they have not constructed a sustainable business model.

The BilltoMobile Sprint agreement will bring a total of 240M US customers  to the service (when combined with recent deals with Verizon and AT&T).  Now that billing to your mobile phone is free from the premium SMS constraints, I would expect to see a move beyond the $25/mo limit once BilltoMobile updates their risk models. As the CNN article above mentions, stepping away from premium SMS also gives carriers a cost structure compete with card payments.   There will be a very interesting play for the MNOs as they combine this service with NFC payment at the POS.

Thoughts appreciated

– Tom

iPhone 5 – NFC “Twist” (OpenNFC)

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Update Mar 14

No NFC for iPhone 5. Too many architecture considerations.. (below). So while their patents clearly indicate it is in their plans.. they have not been able to coordinate all of the design into their iPhone 5 program (from hardware through software and apps).

See article from UK’s Independent

Update Mar 3

Multiple SEs are too complicated for Apple. Think they actually want to control everything and have one wallet with multiple cards. So much for ISIS having a TSM. Verizon/AT&T must be pushing back.. why subsidize the iPhone and let Apple control it? My guess is that JPM and Visa are also Apple launch partners (which further diminishes ISIS value prop). The downside of controlling everything.. is that YOUR TEAM becomes a throttle to success.

Feb 21 2011 (Updated)

Apple is a tremendous company, beyond its design and technical prowess the factor that most impresses me is its unique ability to maintain confidential information. How can such amazing innovation come out of a company that seems to operate as a mix between the CIA and the Hotel California (checkout any time you like… but you can never leave…)?

Last week Brian White of Ticonderoga Securities spoke of Apple’s plans for NFC with a unique twist. So what is the “twist? My guess is that the TWIST relates to Apple’s plan to support multiple Secure Elements (ie, one embedded,  another in UICC).  This would allow Apple to “support” MNOs driven initiatives and also create a closed system (described in many patents below).

For background on multi SEs see GSMA whitepaper

The GSMA NFC project recommends the UICC as the most appropriate secure element (SE) in mobile phones. It is foreseen that other secure elements (removable and non removable) may be implemented in mobile phones. As a consequence, applications may be hosted in secure elements other than the UICC. The selection of the secure element hosting the targeted application shall be solved. This case only applies in card emulation mode.

Most NFC pilots have launched with a single application in a simplified environment. The long term future of what NFC really looks like is very, very hazy. Many potential complexities arise, as best described in the Stolpan whitepaper (a EU consortium now largely defunct, an irony in its own right). Apple (or ANY MNO) certainly can’t build a business on this complexity. A multi SE architecture could also provide Apple with a mechanism to address anti-trust challenges on platform fees and openness/control (Washington Post – Apple’s Subscription Model Sparks Antitrust Concerns).  Apple would compete on quality of service and integration, but allow other applications to also “exist” in a separate environment with a different “trust”.

The champion of Multi SE architecture is Inside Contactless (OpenNFC).. a very very smart “Judo” move that leverages NXP’s substantial momentum (in integrated NFC/controller/radio) against itself. Inside’s perspective is that there is no reason for the ISO 14443 radio to ONLY be controlled via NFC (treat it like a camera). Inside’s OpenNFC provides for “easily adaptable hardware abstraction software layer, which accounts for a very small percentage of the total stack code, meaning that the Open NFC software stack can be easily leveraged for different NFC chip hardwalet multiple applications and services access it”. Handset manufactures love this model.. MNOs hate it. As I stated previously, closed systems must develop prior to open systems as investment can only be made where margins and services can be controlled. OpenNFC changes the investment dynamics for MNOs, and provides new incentives for Google/Apple/Microsoft, … to transition their closed systems into NFC platforms.

Along these lines (Apple AppStore into NFC Platform), I need to correct the assertion I made in my previous blog Apple and NFC.  In it I stated that NFC “control” for Apple was about advertising control (not payment revenue).  What if Apple evolves all of its current applications into a “trusted” (in NFC context) environment, with secure storage and access restrictions (GPS, Alerts, phone, camera, NFC element, payment, advertising, enforced customer anonymity, …)? Apple could also enable this new architecture to support new secure areas for the Mobile operator (or other TSM) to provision secure services, or even an “open area” where the customer can run anything they want.  In this multiple secure element example, Apple would seek to control (and monetize) access to device services and seek to INCENT all providers to run within the APPLE SECURE ENVIRONMENT.. but would provide an alternative (that it does not manage, support or control).

If this is indeed Apple’s plan I will have to update my prognostication on the death of mobile apps (in favor of HTML 5). Particularly for Apps that leverage any of the Apple services I list above. This scenario is consistent with Apple’s  Patent US10200082444 PORTABLE POINT OF PURCHASE USER INTERFACES

[0088] Close range communication may occur through the NFC interface 60. The near field communication (NFC) interface 60 may operate in conjunction with the NFC device 44 to allow for close range communication. The NFC interface 60 may exist as a separate component, may be integrated into another chipset, or may be integrated with the NFC device 44, for example, as part of a system on a chip (SoC). The NFC interface 60 may include one or more protocols, such as the Near Field Communication Interface and Protocols (NFCIP- 1) for communicating with another NFC enabled device. The protocols may be used to adapt the communication speed and to designate one of the connected devices as the initiator device that controls the near field communication. In certain embodiments, the NFC interface 60 may be used to receive information, such as the service set identifier (SSID), channel, and encryption key, used to connect through another communication interface 58, 64, 66, or 68.

[092] … The security features 74 may be particularly useful when transmitting payment information, such as credit card information or bank account information. The security features 74 also may include a secure storage area that may have restricted access. For example, a pin or other verification may need to be provided to access the secure storage area. In certain embodiments, some or all of the preferences 72 may be stored within the secure storage area. Further, security information, such as an authentication key, for communicating with a retail server may be stored within the secure storage area. In certain embodiments, the secure storage area may include a microcontroller embedded within the electronic device 10.

There are 4 market forces at work which may drive a multi-SE approach

  • Protect App Store/iTunes Model
  • Support MNO Models
  • Anti-Trust Concerns
  • Control Platform

Your feedback is welcome

– Tom

Other Information

Digital Goods: Where to Invest?

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 17 Feb 2011

Digital goods are everything that can be sold and shipped online (music, movies, articles, ring tones). John Doerr (legendary KPCB Partner) certainly turned heads in Nov 2010 when he said Zynga is “our best company ever”.  What is driving the explosive growth in digital goods? Social gaming. The nice thing about running a credit card network is that you can see who is making money. No doubt a factor in last week’s $190M Visa acquisition of Playspan.

A key benchmark in the category of “digital goods” is Apple. Within Apple’s annual 10k digital goods revenue is accounted for within the  “Other Music Related Products and Services” category.  This category also includes app stores. For FY10 Apple saw a 93% increase in iPhone sales, but there was only a 23% uptick in “digital goods” (growth in line with previous 2 years). This makes intuitive sense given that Apple customers did not need to repurchase their iTunes library from iPod 1 to iPhone 4. But Digital Goods has certainly NOT been a key source of  growth for Apple. 

Lets take a look at Zynga. As I stated in previous blog,

…three years old with an estimated market value above $5 billion with more than 320 million registered users and estimated revenues above $500 million… From my perspective, Zynga’s secret sauce has been its ability to get 1-2% of their customer base to pay for game credits (see Gawker article). Although they have recently agreed to a 5 year deal with Facebook, this patent (if granted) will provide them leverage in future negotiations and extending their services outside of the Facebook platform.

For more info see TechCrunch / Steven Carpenter Zynga analysis (excellent)

The fortunes of Zynga have been tightly tied to the success of Facebook. Facebook’s new payment policy (mandating use of Facebook credits) will enable them to capture 30% of revenue. Zynga’s margins are obviously impacted in this move.. I’m sure many people immediately see the analogies here with today’s WSJ article (Apple Risks App-lash…) on Apple’s 30% digital goods tariff.  

As an investor, where do you place your social gaming bets?

A foundational digital goods investment question is your view on how social gaming can exist. Can social gaming survive in a model disconnected from Facebook and Apple? If you believe so, then possibly place bets in the Google model. Over the past 6 months, Google  has made five acquisitions in the field: SocialDeck, a mobile social gaming company; Angstro, a social networking search application; Like.com, a social fashion store; Jambool, a social gaming virtual currency; and Slide, a social game maker, and a $100M+ stealth investment in gaming giant Zynga.  Beyond Google, other views exist for social gaming in a mobile context  (MNO driven model).

Now that you have chosen the model (I’m tired of using the word ecosystem), where will your bet play? I see 5 categories:

  • Games (Zynga, EA, …)
  • Analytics/Incentives/Advertising
  • Distribution
  • Gaming Infrastructure. Example Payment, Hosting, Mobility, Support, …
  • Confluence. game-community, game-retail, game-mobile, game-mobile operator, … Example.. earn farm $$ by visiting a retail store and checking in..

Is social gaming a sustainable category? My personal preference is to place bets in common infrastructure until the next Zynga flourishes. Something I learned from Larry Ellison “when there is an arms race, don’t fight.. sell the guns”

Feedback appreciated..

Mastercard/RIM: Mobile Payments Dark Horse

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17 Feb 2011

My blogs will be getting shorter.. quite a busy month. I’ve been very quiet on RIM and Mastercard and thought it was time to speak up for a group with a good plan and great leadership. Facts:

  • MA just hired Mung-Ki Woo from Orange to lead mobile
  • MA has abandoned Obopay (Obopay set to announce VMT integration in next few weeks)
  • RIM is the only handset manufacture with a card partnership. MA has announced RIM partnership in Sept 2010
  • Original MA proposal to RIM was from now defunct eComm Financial. (eComm’s assets are TBD, but my guess is that MA has acquired them)
  • RIM has announced NFC plans for handsets this year
  • RIM has 3 core assets not held by competitors: corporate server, “push/PIN” messaging and a hardened secure architecture with military grade encryption
  • RIM has failed in business leadership with its own “app world”
  • RIM’s user demographic is unbeatable..
  • Mastercard is 5 years ahead of Visa on contactless and in NFC.

My theory is that RIM may have a unique way to get to market and circumvent ISIS in the US. Keep your eyes peeled for anything surrounding the TSM for RIM. If RIM and MA are smart (and they are) they will work to design a TSM as an extension to RIM’s existing PIN messaging architecture (secure).

BlackBerry PIN-to-PIN (sometimes referred to as Peer-to-Peer) messaging is similar to e-mail in that it allows BlackBerry device users to send messages to each other, but with important differences:

A “PIN” is a hardware address, similar to a computer network adapter’s MAC address, and is unique to every BlackBerry device. A “PIN” is not an authentication password nor is it a user identifier. It is the method by which the BlackBerry device is identified to the RIM relay for the purpose of finding the device within the global wireless service providers’ networks.

In this relay service RIM has a global directory of BBs, IMEI/PIN, MNO provider, BES Server, eMail, … and hence the “ability” to directly message customers and for customers to message each other (independent of contracts and BES service PIN limitations).

What all this means is that if RIM puts the ISO 14443 radio on the phone, it doesn’t need the standard NFC/SWP architecture… it has the facilities for OTA provisioning and secure applications separate from a UICC. Carriers will not be in a place to dictate phone architecture to RIM as they are procured directly by governments, and corporatations.. For example, the US government should prefer this architecture, as it gives the handset owner and BES provider control over who is the “TSM” in a quasi NFC context. 

This keeps it all very simple for Mastercard, as they can roll out PayPass in Blackberry without MNO support… For banks.. this means that RIM/Mastercard may be the only way for you to put contactless IN a phone (Stickers are your only other option). The Google Android ecosystem is somewhat disadvantaged here:

  • They are heavily depending on ISIS MNOs for distribution
  • They are not in control of handset hardware architecture
  • No OTA provisioning alternative (like RIM’s PIN Relay)

Lets see if RIM and MA can pull off the business execution.

– Tom

Mobile Apps will Die

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16 February 2011

LOL.. this blog is dead wrong. leaving it up here as a history lesson

—————————————–

Yeah.. thought the headline would make you read this one. This was the theme of yesterday’s  WSJ article covering a NYC Mobile Monday Confab. I agree with these young CEOs, as I’m sure would James Gosling, Grady Booch, Marc Andreesen, Alan Kay (and the Xerox PARC team). Most of the readership of this blog are business/payments folks, and probably don’t recognize the names or the technical dynamics at play. Objective of this blog is to give a business perspective on a “death of apps” dynamic as these business execs are the ones who actually fund (and take the risk) on these technical approaches.

Let me start off with 2 stories

Story 1 – 1994

A long, long time ago (1994)…  Netscape launched and gave ability to view basic HTML. The experience was rather dry, with even “drop down” boxes a major accomplishment. There was very little transacting, and the internet looked like one big marketing brochure. Early stage corporate use was limited to “employee directory” kind of functions, and interactive employee applications were built on … wait for it… POWERBUILDER, VisualBasic, or … for the more advanced companies… Smalltalk (an excellent language and my personal favorite). IBMs OS2 Warp was easily winning the enterprise war against Microsoft’s 3.1, a release which required a TCP/IP add on (Win95 came the next year in 1995). 

Enterprises had a desktop mess, applications had to be installed with all of their supporting libraries, on multiple machine types, with multiple operating system versions, hardware versions, most of which conflicted. Fortunately internet browsers began to develop more and more functionality, with scripting and embedded virtual machines of their own. “Light” applications began to migrate to the browser with a significant advantage in cost to deploy and a slight disadvantage in functionality. As browsers and standards further evolved, more applications changed their architecture, attracting more top tier developers. Fat client apps became an ugly legacy (for all but Microsoft’s Office applications).

Lessons learned: multiple proprietary architectures won in “functionality” but lost in cost to develop, cost to deploy and cost to service. Greater investment in a “sub standard” approach enabled faster growth, focus and subsequent adoption. Open architectures allowed multiple parties to create profitable businesses, and further invest.

Story 2 – Fat Mobile Applications

I had a tremendous global team at Citi, quite frankly some of the best and brightest people I have ever worked with at any company. As head of channels for Citi Global Consumer, mobile (outside of the US) was in my domain. Banks are highly driven to reduce cost to serve and acquire. Mobile was (and is) a channel with much experimentation. At Citi I took a look at 6 key mobile initiatives within the last 3 years to look for patterns of success/learnings that could be leveraged. We had developed “fat client” mobile applications in US, Germany, Japan, Mexico, AU as well as SMS based applications in PH, SG, IN, Indonesia, … In every case fat client mobile applications failed.  Why? Technology, user experience, cost to deploy, MNO “support”, …  The testing matrix of handset types, OS types, screen size, OS versions, …. was just not manageable.

Perhaps the biggest learning of all.. is how mobile is viewed by the customer. As my head of mobile in HK (Brian Hui) told me “what is so urgent that the customer can’t wait to get back to their PC”? Customers want speed and simplicity in their mobile interactions. For services like “what is my balance”? Fat clients are not needed. Even today, bank mobile applications are largely a competitive “me too”, as deployment costs to support 3 platforms (RIM, iPhone and Android) are much lower than prior “universal” support attempts. Although the statistics are not widely published, more than 3x customers access their bank through a mobile browser than through their bank’s mobile application (not everyone has an iPhone.. imagine that).

Proprietary Closed Systems must go first in NEW markets… then evolve or fail

As I mentioned in my previous blog, history has shown that closed networks form prior to open networks (in almost every circumstance). Closed networks are uniquely capable of managing end-end quality of service and pricing. This enables the single “network owner” to manage risk and investment. How can any company make investment in a network that does not exist, it cannot control, at a price consumers will not pay, with a group that can not make decisions or execute? Answer: Companies cannot, it is the domain of academics, governments, NGOs and Philanthropic organizations.

The principle challenge in evolving a closed business platform is financial. The margins associated with maintaining “control” of a platform are substantial… they are very hard for any company to give up (ie Microsoft, Apple, IBM). Just take a look at today’s WSJ regarding Apple’s subscription service plans. Apple wants to take a 30% cut of everything ever sold to its platform… for eternity. Can you imagine Microsoft asking to take a 30% cut of every fee on any item viewed or played on a Windows PC? How do you think Amazon or the music industry feel about this? Every iPhone App developer? It must feel like a Faustian bargain at best.

Apple’s big advantage today is app revenue, as it provides:

  • Terms and Control
  • In App Billing
  • In App Advertising
  • Consumer Payment Management

Yet I digress…. what about fat apps? This is why I like Google’s model, and why it will be so hard to compete against them. As Google evolves Android into an open mobile platform, the “app” revenue model will evolve as well. Just as with Apple’s Mac experience, it will be difficult for Apple to attract continued investment.  Given the tremendous talent at Nokia, MSFT, Google, RIM.. I’m sure they see the analogy to the 1994 example I have provided above. An “open” mobile browser with enhanced features would destroy the Apple ecosystem. App developers would choose “open” first (IF they could monetize their investments). Every handset manufacture and MNO has incentive to develop and invest in a “kill the app” mobile browser standard to compete with Apple and change the competitive dynamic.

One exception I see is in mobile “secure” applications. In this the GSMA and NFC Forum are absolutely brilliant… they have defined a common standard.. unfortunately the business model to monetize it has not yet developed. They had the right technical team design it.. can they get the right business leaders to make is successful? (see related blog)

Excellent TechCrunch Article on HTML 5  Feb 5, 2011

PayPal Revenue to Double by 2013

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I highly recommend listening to the webcast from eBay’s Analyst Day yesterday

http://investor.ebay.com/events.cfm

Will write a more thoughtful post this weekend..  just some quick thoughts

I like the 2x growth plan… REALLY LIKE IT.. For the record I have a bias: I have a paypal account, merchant account, paypal debit card, iPhone app, and I know several of their current and former execs. PayPal has the product, plan, network, and market to execute on this growth plan… their only issue seems to be talent.

Just 2 weeks ago they lost their key platform executive Osama Bedier to Google, this is the exec that was in charge of PayPal X, Platform and Emerging technologies. Last year they lost Dickson Chu (head of product) to Citi and Jack Stephenson (head of strategy) to Chase. These are some of the best payment/platform execs on the planet. What is going on?

Don’t get me wrong, Scott’s directs are excellent executive leaders: Ed Eger (great guy and friend), John McCabe (was fantastic at Wachovia), Gary Marino (Bank One CCO/CMO)… But bankers operate differently than the talent that started eBay/PayPal. Not that different is a bad thing… but it certainly leads to friction. Bankers understand credit risk, regulatory risk, pricing, ANR, LLR, CNR, … but do they understand platform? alliances? convergence? Remember Paypal is not a bank.. at least not yet.  PayPal’s top level vision looks good, but my guess is that the bankers on the exec team are drowning out the message from talent with the skills to build and execute the plan. Scott seems to have a culture problem…. with a 2x rev growth target I doubt if they will spend much effort addressing it. Perhaps this is just the normal maturing of a business model…

How will PayPal generate revenue in the next 5 years? Does it follow the path of a Visa? If it believes in a “convergence” strategy who is it partnering with it? Can you build a platform without partners? Can PayPal build a network alone? is the current merchant/consumer value proposition strong enough to transition to POS? Digital Goods? What does PayPal know about the “cloud” when compared to Amazon and Google? Have you seen Amazon’s growth? Just incredible…

The good news for PayPal is that Visa/MA are failing in online and mobile plans.. PayPal has strong merchant loyalty, and 95M consumer accounts.  PayPal has tremendous runway available for network expansion in its current model.. adding perhaps credit. But I give them very low odds of executing in digital goods, or mobile without reorganizing the business, creating a separate business unit which will attract a team that can create and execute new business models that work.

2010 PayPal Analysis – Part 1

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11 February 2011

I finally got around to reviewing eBay’s 2010 results given that today is analyst day. PayPal is a machine! 24% Rev Growth on 28% increase in TPV (ex FX), with off e-Bay growth of 38%.. just tremendous!

 

I’m a very big fan of what they have done internationally, and the prospects the have at the POS (related blog). I encourage readers of this blog to take a read through their 10-k (http://investor.ebay.com/sec.cfm ).

One aspect of their business I don’t understand well is BillMeLater, given its 50% YoY growth,  $1B ANR, and 14.4% risk adjusted margin I thought is was time to get a little more in the details.

From eBay’s 10-K : BillMeLater

…Currently, when a consumer makes a purchase using a Bill Me Later credit product issued by a chartered financial institution (WebBank), the chartered financial institution extends credit to the consumer, funds the extension of credit at the point of sale and advances funds to the merchant. We subsequently purchase the receivables related to the extensions of credit made by the chartered financial institution and, as a result of that purchase, bear the risk of loss in the event of loan defaults. Although the chartered financial institution continues to own each customer account, we own the related receivable, and Bill Me Later is responsible for all servicing functions related to the account.

WebBank is a Salt Lake City, Utah based ILC operating as a subsidiary of Steel Partners Holdings L.P. 

From FDIC (http://www2.fdic.gov/idasp/index.asp). WebBank: 2010 Income $4.3M, Assets $84M, Liabilities $65.4, Equity Capital $19.2, Employees ~40.

WebBank provides similar services to Prosper (P2P Lending), From US Senate:

Loans arranged on the Prosper web site are physically made by WebBank, a Utah-based industrial loan company regulated by the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC).  Once bidding on a loan closes, WebBank funds the loan, the loan funds (minus the origination fee) are electronically deposited into the borrower’s bank account, and WebBank sells and assigns the loan to Prosper, without recourse, in exchange for the principal amount of the borrower’s loan.

eBay has $1B in BillMeLater receivables running through a company with $19.2M in Capital… I’m somewhat impressed that WebBank can do this kind of origination volume with 40 employees… But the margins certainly don’t look very good. 

Many retailers are thinking about instant credit…. is this the ideal retailer/bank model? Origination Risk would likely not have been something I would want to have taken on at Citi… certainly not at these margins. Is there something else in the Steel LP that makes this attractive?

See my previous blog on ILCs and Credit

Nokia’s Opportunity: Building an NFC Ecosystem

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8 Feb 2011

Most of you have read Stephen Elop’s scathing internal assessment of Nokia yesterday: “Burning Oil Platform”.  Although I will probably get laughed at for this… I’m actually quite high on Nokia. At least the CEO knows there is a fire.. which is the last phase in the Kubler-Ross Five Stages Of Grief ( 1. Denial and Isolation. 2. Anger. 3. Bargaining. 4. Depression. 5. Acceptance). Now what?

Nokia and Motorola are very similar in many respects. Both have heavy (VERY HEAVY) engineering driven cultures. This engineering excellence has led them to their current market position, and these teams are just tremendous. The downside of the engineering focus is that areas like Marketing, sales, and alliances have always taken a seat far in the back of the bus. When handset competition was driven by feature/function this was no issue.. but Apple and Google have changed the nature of handset competition and how consumers perceive value. Beyond the number of apps available to consumers, it is the number of BUSINESSES that are investing in the platform. Google and Apple have created platform ecosystems that enable many businesses to enhance the platform at a pace that a single company can’t match (sorry Apple), in new dimensions (Apps, in app advertising, NFC, …et), with new business models (see previous blog).

Elop has the right background to change this, and has a number of opportunities to put Nokia into a position to uniquely compete. My suggested focus: create a platform ecosystem around NFC, with Europe and a few Asian markets (SG, HK, AU) as the launch pad… Find a model where you make Google a partner. Why? It aligns with your core competencies, and your competitors are failing in the NFC platform. Apple is seeking too much control, and Android has poor focus beyond the broken US market. What if Nokia was Google’s key partner outside the US?

For those outside the MNO world, what I’m suggesting is heresy to many in the Nokia Symbian world. Its like telling the French that they should throw away their dead language and force adoption of English. Elop’s challenge is creating a platform business akin to what he ran at Microsoft. This takes ability to partner…. partnerships mean deciding on WHAT you must focus on. In Smart Phones… where is the competition battle? If it is App Stores can Nokia get a critical mass of developers writing to its platform as it looses the US market?  Where is the revenue opportunity? Is it the handset?

I’m certainly not suggesting that Nokia completely abandon Symbian… but what about providing an option? What if their phones were the only ones that could support multiple OS? Run any application? In the NFC model I’m suggesting, OS should not be the competing factor.. what Nokia needs is other companies investing in its platform. NFC seems to be a key prospect given the trajectories of other efforts.

As an example.. handset manufacturers control the “keys” to NFC’s secure element. Industry insiders guess Apple is planning to keep them from the MNOs.. could Nokia take a more “open route” by creating an global independent TSM… a “java” kind of approach. Today NFC software start ups are locked in by both handset manufactures and MNOs…. could Nokia leapfrog Apple by enabling companies to invest, and go to market, in NFC?

Nokia is not a dumb contract manufacturer. It is one of the best handset engineering companies in the business. WHAT it is engineering to is the operable question. An OS generic NFC ecosystem approach seems to be supported by over 130 NFC Patents as well (second only to Sony). This NFC Communications World article does a tremendous job outlining Nokia’s NFC Platform business model. Beyond the NFC ecosystem, Nokia is already assuming an equally broad leadership role in LTE, a world where all of your consumer electronics will will communicate with each other and your phone. Therefore, I disagree completely with Venture beat that Microsoft is the partner of choice.. Nokia’s plans should be one that makes OS the commodity.. let the customers and the market decide.

NFC Patent Portfolio

NFC Patent Portfolio

The first challenge for Elop is cultural. As a generalization, Motorola is rather hierarchical and autocratic, where Nokia takes on the Finnish consensus driven management culture. Given that Nokia’s primary asset is people, it is very difficult for Elop execute a “Steve Jobs” type of vision and command/control without destroying his organization. Is the burning oil platform analogy the first step in building the case for change? I would expect his next announcement to be a big vision… how will the stars in the Finnish company react?

Thoughts appreciated