Google Wallet Thoughts

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13 June 2011

Please see my disclaimer at top.. this is a biased blog.. (comment necessary because the PayPal folks don’t like me this week)

The rumors of my death have been greatly exaggerated…

–       Mark Twain

To restate from my tweet yesterday… Google Wallet Dead? Come on.. Just draw a simple chart 50 engineers working on a May 2011 go live.. and now 13 months later Google just stops working on it ?… just goes away? The Wallet team has only gotten bigger.. Do honestly think 50+ engineers are are all working support? Obviously something new is coming up..

What will the “new” wallet address? Well let’s look at the obvious issues:

  • Consumers don’t use the wallet after an initial “novelty phase”. I could have saved Google quite a bit of money on this one.. this is what my NFC pilots in 7 countries taught me at Citi. This problem is not unique to Google… it effects all NFC pilots.  Customers just don’t care whether they tap or swipe. This is the central problem that must be addressed.. there IS NO VALUE in the payment itself.. but rather the COMMERCE PROCESS. (see my previous posts)
  • Carrier control of the NFC element. This is just a mess, as is the entire supply chain (see 12 party fur ball). It is beyond repair. The carriers want to charge for each and every access of the secure element. That’s right, they want to charge credit card companies $1M a pop to get their cards in, and Hotel room providers for the right to enable phone as door key. This is a replay of their “walled garden” strategy they have tried many, many times (see Carriers as Dumb pipes).
  • Ubiquity (what goes in the wallet). Do Consumers really want to use a wallet that only accepts 3-4 specific issuer cards? Google wants customers to put whatever they want in the wallet, at no cost.. loyalty cards, debit cards, prepaid cards. Their “problem” is neutrality.. they appear to be a competitor to everyone (see related blog). Google wants to “enable” everyone.. if banks can create value… fine.. if merchants can create value.. fine. .but they are not taking sides. After all it is the consumer that chooses what works for them. For example, I don’t use Target’s iPhone app for price comparison inside a Target store…
  • Ubiquity (phone types). There is a limit on number of NFC enabled phones available for consumer use. You can’t create momentum by forcing people to upgrade phones.. that plays into Carrier control. The objective of any Wallet is not to force a phone upgrade, but to deliver consumer value.. to every consumer.. online and offline (my Blog on TXVIA). You must feel sorry for the carriers.. they would love to ship 2M+ SWP enabled phones.. but there is no supply chain cranking them out.. (yet I digress).
  • Ubiquity – Acceptance. The big retailers are not jumping over themselves in a rush to support tap and pay. Who pays for all of this new infrastructure? How can small merchants bypass stand alone terminals from Verifone and specialize cash registers (ex Square’s Register solution is superb)?
  • The most important element:  VALUE PROPOSITION. Take a look at Google’s merchant list for launch (http://www.google.com/press/pressrel/20110526_wallet.html), now take a look at ISIS (http://news.paywithisis.com/2012/05/15/isis-adds-first-merchant-partners/).. Notice a difference? The big retailers are running away from the carrier/bank back mobile payments initiatives because #1 they don’t drive customer acquisition/sales  #2 have higher cost payment instruments (credit only). New value propositions must impact both.. See blog on Retailer’s Wallet plans

As I’ve stated before, pretend you are a retailer and draw a Venn Diagram. Put yourself in the middle. Now think about how you are going to influence customers before (or while) they shop with you. What % of customers does Verizon or ISIS currently influence? How about the banks? PayPal?  Draw a circle for each… base the size of the “influence circle” on number of times these companies influence with YOUR consumers every day. INFLUENCE.. NOT SERVE or INTERACT?

Folks, the challenge is NOT PAYMENTS.. but Value in COMMERCE.. Value requires supporting consumer and retailer interaction in 100s of ways.

I have no idea of what Google will release, or when they release it.. but I do have a great deal of confidence that it will be a major step forward in addressing the issues above.

BAC – Offers Success?

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4 June 2012

I’m using my new BankAmeriDeals and I like it.. really cool. Here is my WalMart redemption. What is success here? For Bank of America? For Wal*Mart?

10 Years ago I was a banker in the room with Wal*Mart and they asked “what justifies any card taking a percentage of my sales”? “What customer have you ever brought me”?

Will Card linked offers be the vehicle by which banks finally deliver value to retailers?

As I mentioned in my previous CLO Blog the average gross margin in Retail (globally) has gone from 4.2% in 2006 to 2.4% in 2010 (ref: IMAP’s Retail Industry Global Report 2010). Given this margin compression, and the fact that retailers spend very little of their own money on marketing, you can see why basket discounts are not widely used, but rather targeted. Given that this Wal*Mart incentive is for 5% cash back, it would seem to be somewhat unsustainable. Even worse.. it was given to every Bank of America Customer.

For this 5% cashback offer, Walmart receive no incremental spend, it was my wife’s normal trip to the grocery store. She didn’t even know I registered for this program.

Quiz time. Who funded the BAC WalMart offer?

1) Wal*Mart

2) Cardlytics

3) Bank of America

Yes it is #3 according to my sources. Bank of America is funding almost half of the incentives in their program, and they are not alone. Retailers are not advertising in the CLO space because of issues associated with “lift”, “reach”, targeting and distribution (outlined in my previous blog). BAC is not alone, rumors are that almost 50% of all CLOs are actually funded by the participating banks or even the venture money received by the “platforms”.  Wow..  I had no idea it was this bad.

My guess is that BAC will now have data to take to Wal*Mart and show what incremental spend they drove. Although 0 incremental spend for me, BAC will be able to show WMT that some consumers chose to switch their grocery purchase because of this 5% incentive. This will in turn lead to “targeting” of incentives to particular audiences and also lead PERHAPS to Wal*Mart participation.  I think this is a very smart move by BAC, and they are 3+ years ahead of this on debit.. all of the other banks are chasing the credit side.

The downside is that the retailers know this is a VERY SLIPPERY SLOPE.  Now that WMT participates.. the banks will go to the other grocers to switch them back.. and then these incentives will be an added cost of doing business for all who wish to influence highly elastic customers. The alternative is to target product level incentives to customer (item level) elasticities. This is what the retailers are planning to do outside of the CLO space, and why BAC will find few “takers” for this. Coupons.com is the leader in grocery space with Safeway and WMT, google is close behind with its recent Zave Networks acquisition and Inmar with recently purchase mdot.

Outside of grocery the same dynamic exists.. cards can indeed motivate a switching behavior with some customers.. but is this a Faustian bargain for retailers?

Take aways:

  • Card Linked Offers have a very long way to go
  • CLO Companies and the banks are paying for the incentives
  • BAC is only bank active for CLO on debit
  • … all of the other issues on value proposition mentioned in previous blog

 

 

Groupon Cash Register?

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31 May 2012

As reported in today’s WSJ, and 6 days ago by Bloomberg, Groupon is working on a Square competitor… So the list of companies that now enable any mobile phone/tablet to be converted into a POS to 7?

  1. Square, $4B GDV Run Rate
  2. Intuit/VZ, goPayment
  3. FirstData mobile pay
  4. PayPal + Roam?
  5. Groupon?
  6. Google?
  7. +10 other small start ups leveraging hardware from Verifone, RoamPay, MagTek

I joked in a tweet that perhaps this is why IBM sold its RSS division to Toshiba for $850M (a $1.15B revenue business).

What is value here? It is card acquiring? POS systems? Advertising? or something else?

Most of us would agree that it makes little intuitive sense for a small business to have multiple pieces of specialized hardware. A specialized, locked down, PC acting as a cash register connected to a specialized locked down payment terminal.

Did you know that retailers like WMT and Safeway have teams of over 500 customizing IBM’s 4690 ECRs? What on earth could these people be doing? A: Multiple tax jurisdictions, discounting rules, loyalty programs, regulations, hardware upgrades, software upgrades, new products, coupons, …  a rather messy business. Similarly few people realize that the payment terminal which we swipe our card is actually owned and delivered by the retailers acquirer.. the retailer just plugs it in. This helps them solve PCI compliance issues by keeping the store completely removed from unencrypted card info.

As my 8+ square blogs have indicated, the real “macro” opportunity many of these companies are chasing is in orchestrating commerce. Commerce is a process that includes marketing, incentives, shopping/selection, purchase, and after sales support. Square has evolved from a payment acceptance doggle to a retailer commerce solution.  Groupon has come about their POS from a different direction.. they need to improve the retailer and customer experience at time of use.  Both will be heavily into advertising (offers, incentives, …) by end of year.

What retailers want are tools to drive customers into their store (acquisition), fill empty seats (yield management),  get existing customers to buy more (basket size) and improve margin (price different customers differently).

Mainline POS manufacturers like Micros, NCR, Aloha, … have a list of companies requesting that they pre-integrate incentive solutions into their software..  By integrating incentive solutions into the POS, advertisers (and intermediaries) are hoping to close the loop in advertising. Closing the loop means allowing the advertiser to determine if a given advertisement resulted in a purchase. This would in turn allow for “performance based” advertising as opposed to cost per million, or cost per click. Today, there are very few performance based advertising solutions, as most advertising is completely untargeted.

But software availability does not equate to usage… as each retailer has their own marketing objectives. Believe it or not, retailers want to spread their campaigns across multiple advertisers, with many different programs to reach different audiences. The incentive for a new acquisition to my coffee shop will look much different than the program to retain customers (Starbucks being #1 here). Also customers are spread across multiple channels, and retailers sometimes operate as franchises that each market separately.

Case Study: Fishbowl

Fishbowl is a 10 yr old Washington DC based company 100% focused in Restaurants. Fishbowl gets its name from the fact that we drop our business cards in a fishbowl.. and the store wants to do something with them. CEO Scott Shaw is both a restaurateur, and serial entrepreneur. He and his team have done an unbelievable job constructing a campaign management tool that allows local franchisee’s to launch specific campaigns to specific customer segments (with a response rate ABOVE 10%) together with an integrated redemption package. Beyond the campaign management function at the hands of the local stores, there is an integrated “offer manager” that resides within the store’s POS systems (example Micros).  If you guys saw this in action your jaws would drop.. but it was no 12 month project.. Retailers want to test it… see what it does.

Most readers can see the obvious problem here with card linked offers (previous blog ). Retailers do not want to give 15% off to every customer weekly. They want specific incentives.. to specific customers that are not necessarily in a single issuers card portfolio. Add to the complexity the fact that 80% of advertising $$ flow from manufactures and the dynamics further cloud as retailers use trade spend $$ to incent specific product purchases. GM pulled it’s Facebook spend because of this dynamic.

Every network begins with a closed loop system delivering value between at least 2 parties. The solutions in this POS space are not “pure play” electronic cash registers.. but BRIDGE devices hoping to switch transactions within existing networks, while adding new features.  This seems complex for all but the smallest merchants.  I like Fishbowl’s approach better.. starting with a campaign tool that would allow the retailer to touch any customer in any “ad network”.  In the Groupon model, they can only reach their registered customers.. in offer models that they support.  If Groupon had a killer value proposition (for both retailer and consumer) this could work well, if not they suffer from the problem of distribution and targeting (relevant offers).

The Directory Battle PART 1 – Battle of the Cloud

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11 May 2012

This week we had both Finnovate and CTIA going on, and behind the scenes the battle lines are being formed in a forthcoming “BATTLE OF THE CLOUD” wallet. I didn’t include wallet in the quote because Battle of the Cloud sounds so much more ominous. Perhaps I should take a page from George Lucas’ playbook and start with Chapter 4.

I’ve been talking about the directory battle for some time now (see Clearxchange post).  Who keeps the directory of consumer information? As I outlined in Digital Wallet Strategies: “ securing information AND giving Consumers the exclusive ability to control what is shared with whom is a challenge (beyond technology and trust). We thus have many limited “Wallets” that are constructed around specific purposes”.

This week we had Visa’s President tell the CTIA audience that Visa has moved beyond NFC to V.me (see my previous post on Visa Wallet). What is really going on? What is the battle of the cloud?

Square, Visa, Google, PayPal, Apple, Banks, … have recognized the absurdity of storing your payment instruments in multiple locations. All of us understand the online implications, Amazon’s One Click makes everything so easy for us when you don’t have to enter your payment and ship to information. (V.me is centered around this online experience). Paypal does the same thing on eBay, Apple on iTunes, Rakutan , …etc.   But what few understand is the implication for the physical payment world. This is what I was attempting to highlight with PayPal’s new plastic rolled out last week (see PayPal blog, and Target RedCard). If all of your payment information is stored in the cloud, then all that is needed at the POS is authentication of identity (see blog). Remember US  online commerce is $170B/yr, physical commerce is $2.37T (not including FS, Travel/Entertainment).

The implications for cloud based payment at the POS are significant because the entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the breakdown of existing networks and subsequent growth of new “specialized” entities. For example, I firmly believe new entities will develop that shift “payment” revenue from merchant borne interchange to incentives (new digital coupons).  Another example is Paypal’s ability to selectively assume settlement risk on some transactions as they route through low cost ACH, or even allow customers to use BillMeLater to selectively convert certain purchase to loans AFTER THE FACT.  In these 2 examples, traditional payments revenue will be significantly disrupted by: lower cost transactions, competitive credit terms (each purchase), and incentives tied to payment type.

But do consumers really want to store all of their information in one place? With one entity given the ability to see all of your spend? For an mCommerce transaction, there is nothing I hate more than having to type in my name, address and card number in that tiny little screen.  Most of these mCommerce solutions (like V.me) are little more than an “autofill” where the merchant checkout page leverages API integration to the cloud service to retrieve user information (see diagram here). If I’m on my phone, my carrier already knows who I am, so seems fairly logical for them to help me with the autofill. This is a reason I’m now a big fan of Payfone. I could also see why it makes sense for Apple and Google. But why Visa? Does it make any sense at all for Visa to hold my Amex card?  Oh.. let me cast a few more stones on ISIS/NFC.. that payment instrument that locked in your phone.. yeah it can’t be used for the online purchase. Perhaps someday someone will write a secure NFC mobile browser plug in to extract data from the SE.. but that opens up a whole new can of worms.

Today’s online merchants are getting a very small taste of the war as they are asked to integrate auto-fill plug ins (Paypal, V.me/CYBS, Payfone, Google, soon to be Apple). Merchants should get on board with all of them, as they do represent a tremendous improvement in customer experience, and you may be able to squeeze some free marketing/implementation money from each of them. However, the cloud battle at the physical POS is still a few years off, as existing card products have a substantial advantage in risk modeling/fraud. This is where Square is taking a lead, as it has the best consumer experience hands down. Low volume merchants really should assess whether they need a specialized POS system, as the parameters for selecting one have shifted from ISO/Processor/Cost/Acct Recon/Book Keeping to Sales, incentives and customer experience.

Battle starts in mCommerce/eCommerce

My guess on timing of V.me is driven by knowledge of Apple’s impending plans to “extend” its iTunes account to payment outside of the Apple ecosystem. Visa sees this network risk and is in an all out war to protect its network, by leveraging its CYBS asset online. The banks have worked on a directory concept for quite some time. The Clearing House (TCH) built a working system called UPICK to solve the problem of consumers giving their RTN/ACCT# out in the open.. assigning a virtual number to the account. A sort of “virtual account number” that could only be translated by TCH.  It never took off, because ACH fraud was low and banks were much more excited about having merchants accept cards as payment.

Retailers are not silent participants to this war.. their champions are Target, Tesco, Amazon, and Rakutan. I hope Amazon will finally dust the plans off of One Click expansion. Other retailers are also aligning to assess creation of shared cloud infrastructure.  Sorry I can’t comment more. Similarly MNOs are also in the cloud game, for example Payfone may be one of the best services in the market..

Who are the players in the Cloud [Payments] War?

The initial battle will be in mobile/online purchases.

  • Banks: V.me, Mastercard,
  • Platforms: Apple, Google, PayPal
  • Retailers: Amazon, Rakutan,
  • MNOs: Payfone, Boku, payforit, billtomobile, …

Most confusing is that there are few alliances.. it is many against many.

http://tomnoyes.wordpress.com/2011/10/26/apples-commerce-future-square/

Banking the Masses… Prepaid?

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9 May 2012

Today’s WSJ outlines JPM’s plans to issue a new pre-paid debit card out of their branches. In January I discussed the tremendous impact that WMT/GDOT will have on mass market banking, where I outlined that the Fed is concerned that the bottom 4 deciles of customers are no longer profitable for the big banks.. and there is an exodus. How does the US financial system retain customers in the lower mass? GDOT and WMT believe it is not through the typical branch model. Just as with Tesco in the UK, Retailers are proving to be excellent distributors of banking services.

There has never been a better time to be in prepaid!

This is beyond interchange and plastic, we are beginning to see the early stages of an “overhaul” of what banking (and payments) is. The next 3-5 years will be a period of much experimentation. A few of the active initiatives:

  • Retailers as banks
  • Retailers constructing their own payment network
  • Retail pre-paid products (ex GDOT/WMT)
  • Bank’s monetizing data through card linked offers and merchant funded rewards (ex. BankAmeriDeals)
  • New Direct Bank models (ex Barclay’s from yesterday’s WSJ)
  • Phone/Virtual Wallets

…I could go on…

I apologize in advance if this sounds pompous.. but hey it is my blog.. and I want to give you background on how I came to this perspective. I’ve been very fortunate to have been either on the technology side, or as business head of most new banking models: Worlds First Online Bank – FirstUnion’s Cyberbanking  (1995 see wikipedia), First instant account opening and funding US (Wachovia 2002), First International Account opening and funding (Citi UK – 2006), Google Wallet….

The change happening today is many orders of magnitude more complex: consumer value propositions, distribution, technology (ex NFC), regulatory (… for example how do you accomplish KYC in a GPR card sold at a retailer… or mobile operator).

Where do I invest? Its all based upon 2 simple questions:

#1 what value do you get out of your Bank today (compared with alternatives)?

#2 who has a brand Consumers trust?

Most retail banks have rested on very stale product constructs. Why do we have a checking account, savings account and card… with fees on each? Why not have one account where I pay interest if I owe money.. and earn interest if I have a positive balance? Why must I pay $25 for a wire at the branch when it costs the bank $0.05 with the fed? The fee and service nightmare of understanding sweeps, lending, payments, cards, savings, checking, … is just insane. Even the simple products are not simple (particularly when it comes to understanding fees). I’m no fan of the CPFB.. but the Bank’s brought this on themselves… there is real consumer anger.. all of which damages brand and trust. Which of course makes the ground more fertile for competing schemes.

As the WSJ article alluded to… banks actually want the bottom 40% of their customer base to leave.. they are no longer profitable..  This is what the Fed is concerned about.. where do they go?  Most concerning is where will the liquidity go (for non bankers liquidity is the Liability or balance of funds that is stored in its accounts, Assets are loans made by the Bank). Liquidity impacts capital ratios, and lending..  For example, many of you have read my notes on Kenya’s MPESA, that evolved from nothing to holding 10% of Kenya’s GDP in a single settlement account in just over 3 yrs. Money in a settlement account is not available for lending (typically), this was a central point of concern for Kenya’s central bank and other emerging markets as bank liquidity ratios in emerging markets are very compressed.  In the US, major banks are not at all concerned with liquidity… in fact many would  say that they are overly liquid and would like to see the run off. The problem for US banks is Asset quality (qualified lending opportunities).

Wow.. these are exciting times. Companies to watch: retailer friendly plays, as this is where the distribution and data sit.

BTW.. if you agree with any of this.. how on earth can bank’s continue to justify stand alone bank branches.. ? something must change there soon…

NFC and Consumer Choice

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7 May 2012

Thinking about consumer choice today. As the MNOs think about how to lock up the SE and SE Management.. when does a consumer get to choose what is on their phone?

As most of you are aware, ISIS is charging each and every issuer for the “right” to put their cards on the phone. In a tweet 2 weeks ago I mentioned that all of the phones in market have a major problem: they can only support one card emulation application at a time. Although I’m not completely sure if this is a firmware issue or “silicone/memory” issue it relates to the storage on the NXP’s chip. Apparently the latest version’s of NXP’s chips don’t conform to Amendment C of Global Platform’s 2.2 Specification (supporting multiple card emulation apps).

http://www.globalplatform.org/mediapressview.asp?id=777

What this means is that your new NFC phone could have hundreds of Visa cards loaded.. or hundreds of MasterCards.. but the phone can’t support the signed java applets (card emulation apps) from Visa (paywave), Mastercard (paypass), Discover (zip), Amex (expressPay), Transit (…).. you get the picture.

Doesn’t everyone want a wallet where all of your cards can get stored? Visa, MA, Amex, .. plus loyalty, gift, … ?

My hope is that the market (and regulators) will push to keep consumer choice at the center of mobile phone wallets. If the carriers can’t lock down the SE, consumers will be able to choose the most effective option. Retailers know that the only cards willing to “PAY” to get in the ISIS wallet are credit cards.. which obviously impact their interest in accepting a 350bp payment product.

The mobile wallet that “wins” will be the one that offers consumers the most control. Letting consumers load any card they want.. without that card issuer first having to pay some sort of toll to the mobile operator. Also letting the consumer decide who gets access to what data. This last area is something that needs improvement beyond data that is stored in the SE. Right now apps are taking the approach of “take it or leave it” agreeements:.. we get your location, e-mail, contacts, usage, …  This terrible approach is leading to an unbelievable dissemination of data that is completely out of control. This is why HTML 5 will win.. Apps are becoming the paradigm by which companies obtain almost unlimited customer information.. and consumers will wake up soon.

As a side note, isn’t it amazing that this topic hasn’t been covered more broadly? Of course it speaks to the true uptake of mobile payments (at POS) in general..

My funny story: I went to the Duane Reade directly across from Penn Station last month. DR was a Google wallet launch retailer in NYC, with all of the beautiful marketing logos. I waved my phone to check out..  and the store manager was there behind the 8 cashiers.. he said “is that Google Wallet”.. I said no it was a Citi Sticker glued to the back of my iPhone.. I asked him how many purchases he has seen from people using their phones.. Answer “none in the last 2 months”… Across from Penn Station… wow..

PayPals New Plastic

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No Mastercard Logo on this one…

Quite impressed that they have pulled this together.. a new card network…

This is more than a decoupled debit.. although PayPal could choose to assume settlement risk through either ACH, stored debit card (or even ATM??).  Paypal has the facilities to provide lending via BillMeLater (previous post) or to a consumer’s other preferred lender (via stored card). They are completely in control of a much larger value proposition as well.. with integrated rewards and a 3 party financial network that will compete with Discover and Amex.

I’m very, very impressed.. this is a new product that could completely disrupt traditional credit cards. Not only in rewards, coupons and incentives.. but in interest rates for every single purchase. This could be the only card you carry.. Forget about the “pay by phone number”.. the product innovation here is much more interesting than how it is delivered (plastic, phone number, bump, …).

Paypal also has a new site (beta) a few screen shots of which are below.

This new plastic is currently only accepted at Home Depot. My understanding it that Chase Payment Tech will be a lead acquirer for this new Product… I’m sure Vantive, FirstData … et.al will not be far behind.  I will attempt a more thoughtful analysis later… thoughts appreciated.

Carriers as dumb pipes?

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25 April 2012

I just bought a brand new Galaxy Nexus on Google’s new play store today (https://play.google.com/store), very excited to have an unlocked GSM phone that I can take with me around the world. Better yet, I can now take advantage of Google wallet and many new NFC based applications..  independent of any carrier (… although the Sprint people are A+).
Given Apple’s tremendous earnings yesterday: 80% growth in iPhone shipments (30M), 150% year-over-year growth in iPad shipments with margins improving to 47%…. what does the future hold for carriers? If consumers go to the Apple store to select THE product will The Network be an afterthought? Its not just the MNOs who are on the short end of the stick, Retailers also loose when manufactures like Apple create an effective BRAND, PRODUCT and EXPERIENCE (see related USA Today article and Forbes).
How are the carriers responding? What are they doing to deliver new value or help the industries impacted by this new dynamic? They have gotten together to create an environment where they completely control everything: NFC (in the US it is a consortium called ISIS).  I was one of the first to break news of this consortium back in 2009, with some strong recommendations on their strategy (see Ecosystem or Desert).  If you were a retailer, or small company with limited resources, where would you place your bets? With Apple..? or a consortium of mobile operators that have been working for 3 yrs trying to get a pilot working across 12 different suppliers.

This week, I was struck by how similar the carriers “walled garden” NFC strategy is to previous attempts to create a “Walled Garden” . Why are the MNOs recycling the same control strategy? Remember Einstein said “the definition of insanity is doing the same thing over and over again, but expecting different results”.  As background, VZ (and most MNOs) love the “walled garden” strategy.

Version 1(2004-Present). BREW platform from Qualcomm (dumb phones).

Version 2 Handset capabilities

  1. Verizon invested over $300M in GPS “platform”, an investment they planned to recover by charging for Apps that wanted to use GPS. RIM was the first to realize that it could not deliver consumer features at odds with what VZ would authorize.
  2. Firethorn was the first payment related application that VZ promoted. Objective was to limit all consumers to Firethorn as the only approved “signed application” where consumers could check their bank balance. Banks were each asked for $1M to allow for their customers to check their balances on this MNO controlled application.. yeah.. great idea (2007)
  3. Search. $600M exclusive deal w/ MSFT in 2009. Unfortunately for MSFT, Android was not included agreement and then VZ make “Droid” THE key marketing theme.
  4. I could go on.. but

Version 3 NFC

  1. Control SE (http://tomnoyes.wordpress.com/2011/02/03/isis-platform-ecosystem-or-desert/)
  2. ISIS. Consensus is that the carriers will keep plugging along at this for 10 years..  however without talent, retailers and handsets I don’t see how they can sustain investment.
  3. Create a new BREW.. handset platform that leverages NFC and secure customer data.. payment (ISIS) is just one of the applications. Note that most carriers are in midst of issuing RFPs for SE management (my vote is for Sequent here). The objective of this effort is to create a “secure platform” where applications can leverage customer data (for a fee).

Would you want to “play” in a walled garden? The owner gets to make the rules and take the rug out from under your feet (ie MSFT $600M). Where the star (ie Apple) is able to negotiate special treatment or go over the top without you ever being aware? No way.. you can’t run a business like this. I wouldn’t even want to play..

Carriers must think about value creation before they can think about control. Apple earns its margin from brand and experience… they are not forcing people into their store. For example, the Samsung Galaxy Nexus is an unbelievable phone… easily on par with the iPhone.. But the carriers won’t let it in the market unless Google give them the keys to the SE.  It’s just crazy…My 11 yr old son can guess what happens next.. Google starts selling the phone directly (which I bought today). As most readers know, the US handset market is a very strange place (handset subsidies and post paid plans). The rest of the world buys their handsets and selects the carriers based upon cost/coverage. What if Google and Apple were to subsidize handsets through marketing, as opposed to anticipated spend? If telephone calls and data were routed through wi-fi whenever available? What do carriers have left?

Every point of “friction” which carriers create.. FURTHER ERODES their future profitability as this friction improves the profitability and market opportunities for companies going above, around and under them. Carrier business culture and experience all surrounds the walled garden “control” approach. This control approach works well for Apple as it has developed an integrated value proposition.. It does not work for the carriers that offer connectivity. To expand beyond connectivity carriers must create new services.. the must become orchestrators of value.. not controllers of handsets. In other words they need to shift from a “permission/transaction/payment” paradigm to  one of discovery->need->->fulfillment. (see my previous blog).Attention US Mobile operators… today your trajectory is headed toward dumb pipes.  You cannot deliver value through control.. no one trusts you.. and you can’t sustain investments to compete against Google, Apple, Facebook, …

What should you do? Where is the revenue opportunity? It is in value orchestration. You have direct consumer relationships… leverage them for marketing, authentication, personalization, awareness. The good news is that Hardware will peak and reach a “good enough” stage. If hardware is a commodity, then brands will begin to deteriorate.. and value orchestration will shift further from the handset node into the Cloud. If any operator agrees with this.. then ask why on earth are you locking all of this customer data inside a phone (NFC) where it cannot be used or sync’d with the cloud.

I will get off my soap box now.

BTW.. AT&T I fully appreciate that you can disable my new Nexus.. please dont make me go to an MNVO.. just another point of friction.

Square passes $4B GDV

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18 April

Updating my valuation and metrics from previous posts below

http://tomnoyes.wordpress.com/2011/02/24/do-squareups-square/

Last February, Square was running at 9k active merchants, and $2M GDV/day. Today (Mar 2012) Square’s GDV (annual run rate) is $4B which equates to $10M/day ($40-50k/day net revenue). 

Consistent with last year’s analysis, we can derive Square’s revenue and their “active” customer base

Rev = TPV * Transaction Margin

Transaction Margin = Merchant rate less processing costs = 295bps – 250bps = 45-20bps

Square FY12 Rev = $4B * 45bps = $18M  (top end)

 Active Merchants:  ~80-100k

Very impressive growth… They obviously have another source of revenue planned (ie advertising/incentives) if they can justify a $4B valuation…  I give some comparables in this previous blog. A $4B valuation would be $50k/ merchant.. wow.. quite  an acquisition cost. All of this is particularly ironic given IBM’s recent sale of their Retail Store Systems (RSS) division to Toshiba TEC for $870M. RSS has 14 of top 20 global retailers, $2T+ in retail sales, 20-40k developers (in retail IT teams), …

http://tomnoyes.wordpress.com/2011/06/29/squares-1b-valuation-its-not-a-payments-business-any-more/

Nokia, Apple, Android, Value Creation and Distributed Innovation

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10 April

Description: http://static.seekingalpha.com/uploads/2011/10/29/48158-131993377233806-Stephen-Rosenman.jpg(Cool title…? You can tell I’m an engineer)

I was catching up on some reading this Easter weekend and saw one of my old MIT Technology reviews lying around. Article was on Nokia’s new CTO Henry Tirri (Dec 2011). Question came to mind: to what extent does technology influence Nokia’s future success? Is Apple’s current success built on technology?  Of course, although any CTO’s job gets harder when their CEO is forming alliances that are 100% potential and 0% market traction…. Oh I forgot Elop also sold your own OS to Accenture so there is “no way back”. (For more background on Nokia/MSFT see this UK Guardian Article).

What factors will influence success in Mobile? Obviously it is not R&D, as Nokia’s 2.9B EUR ($3.8B) budget was roughly twice Apple’s $2B (see global 2012 R&D Spending report from Battale). Most would agree that Nokia lost in connecting the phone to the internet.. No amount of internal R&D could have led Nokia to build an equivalent network.. yet they did not fully realize the value that consumers could unlock … at least not much beyond e-mail. (RIM suffered from a similar myopia.. security vs usability locked into the corporate environment).  Nokia’s R&D engineers thus toiled away with features they could control and build.. That is what engineers do.. Nokia thought the battle was in feature/function.. and hundreds of specialized designs for many global “segments”. However the consumer opportunity that Apple discovered was not in hardware, but rather in delivering new ways to connect consumers to all things digital… particularly networks (internet, home, social, entertainment, …  and eventually office).

Will “Apps” be the key to unlocking the value of mobile?

In the press last month, we saw the analysis by Flurry that Amazon is kicking Google’s rear in App store revenue (89%), and that Google itself makes 5x more on IOS than Android.  Other recent research from groups like ABI Research reported that mobile app revenue was $8.5B with 39% due to in app purchases (Gartner says $15B). Personally I find both these numbers a little hard to believe, given Google’s Android revenue is $550M and Apple announced back in July that it paid developers $2.5B (cumulatively over life of AppStore). Best guess for Apple’s FY11 Appstore sales is somewhere around $1.6B (see my July Blog)

Total App Store ECOSYSTEM revenue from these Big 3 is therefore approximately

$1.6B + $1.42 (Amazon’s 89% of Apple’s) + $0.55B = $3.57B

Could it be possible that these big 3 contributed less than 50% of global App Revenue? Not likely (sorry Gartner/ABI). As an investor, I’m not keen on Apps as a long lived mobile environment outside of entertainment (subject of another blog). Suffice to say my view is that “apps” are only a temporary technology metaphor for connecting clusters, goods and data. Although not a fan of “apps” I am very grateful that the App environment exists, as it is driving much innovation within a “developer community” (per Platform).  Having thousands of brilliant engineers from around the world work to deliver value benefits us all.  Which brings me to the topic of distributed innovation.

Open/Distributed Innovation

Open Source is a model most of us are well familiar with. (further reading… I ran across a very nicely done paper from 2 MIT students: Implication of Open Innovation and Open source to Mobile Device Manufacturers).  Given that mobile, advertising and payments are all networked businesses… it seems  business models supporting distributed innovation will advance at a faster pace than those where only a single entity controls the entire product or supply chain.  For example, Amazon, Samsung, Motorola, LG, HTC, Verizon, ATT, Vodafone, .. all make much larger investments in the Android platform (than in IOS). (I would love to see an analysis of combined capital investment in android platform)

However, this distributed innovation hypothesis is NOT playing itself out (ie Apple). Apple’s 1Q12 showed iPhone revenue alone was $24.4B, which is bigger than all of MSFT revenue combined.  Analysts have shown that Apple now garners 75% of mobile handset profits, with only 9% of handset market share.  So while Samsung alone has outsold Apple in Units this quarter (41M vs. 32.6M), and Android just topped 50% market share (vs Apple’s 30.2%).. Apple’s handset business PROFITABILITY dwarfs that of all of the competition (COMBINED).

So… What are the factors of competition today? Can someone else change the game?

Most would agree that Apple has won through a focus on design and customer satisfaction. Nothing looks as good, or works as reliably as an iPhone. It brings a consumer’s digital life together; it is also the channel by which we stay connected when we are not at home. Description: C:UserstomDocumentsPersonalblogmobile_os_satisfaction.gifApple’s unique ability to control design and manufacturing quality has obviously provided many benefits (which customers have proven willing to pay a premium for).

The big downside in distributed innovation is complexity, there is a need for a “channel master” or chaos reigns. Many Android users witness this chaos when an app won’t work on a new hardware/OS combination.. Distributed innovation is not something that established businesses are good at. It has proven most successful in product PLATFORMS where the pace of change in each component is changing at a rate where no one company can make the capital investment to remain competitive (ex. Moore’s Law, PC architecture through present day). Intel played a very important role in this process, as it worked outside the scope of the CPU in areas such as: Intel Architecture Lab (IAL, developed common standards like PCI),  stimulated external innovation (developer training, testing, Intel Capital), industry marketing, patent/licensing. Intel defined what the PLATFORM was.. something that is common sense to us today.. but rest assured it was not given to them, rather it was something that they stepped into and took leadership of.

As we look for where the form of mobile competition may change, it would seem to be outside: hardware, software and network bandwith. With respect to hardware, features have recently begun to surpass “good enough” . Samsung’s Galaxy Nexus is an excellent example of how focused hardware innovation has enabled them to surpass the iPhone’s capabilities. If hardware is good enough, and not the primary factor of competition, it must be software, services or data that will drive competition in the next phase…

If platform is decided on software only.. then software platform with most open standard and most users (ANDROID) should dominate as any connected devices (handsets and everything else) have lower cost and more ability to “specialize”, particularly if intelligence is in the network (not the device).  But software is currently not the point of competition either… If not DEVICE software.. then what?

Stage 4 – Shift from Integrated Platform to Value Orchestration

Keeping with the assumptions above:  hardware becomes “good enough”, platform/software become “ubiquitous”, patents are widely shared (ok this is a joke.. checking if you were sleeping), and the mobile phone transforms into the networked device “bridging” the virtual and physical world then value (and profitability) will shift from platforms executing transactions to entities coordinating interactions.  This interaction of entities is what I refer to as Value Orchestration, certainly not a concept I developed. A January 2001 Harvard Business Review Article: Where Value Lives in a Networked World put it this way:

In more general terms, modern high-speed networks push back-end intelligence and front-end intelligence in two different directions, toward opposite ends of the network. Back-end intelligence becomes embedded into a shared infrastructure at the core of the network (cloud), while front-end intelligence fragments into many different forms at the periphery of the network, where the users are. And since value follows intelligence, the two ends of the network become the major sources of potential profits. The middle of the network gets hollowed out; it becomes a dumb conduit, with little potential for value creation. Moreover, as value diverges, so do companies and competition. …. In a connected world, intelligence becomes fluid and modular. Small units of intelligence float freely like molecules in the ether, coalescing into temporary bundles whenever and wherever necessary to solve problems.

This orchestration hypothesis seems to have proven itself in PCs as margin shifted away from the integrated manufacture to component “performance” differentiation (ex. peripheral price/performance) then again to software finally transforming again to orchestrators and “connected” businesses that orchestrate network value (like Amazon, Facebook and Google)…. as hardware evolves into a commodity like business.

The long term investor risk for Apple is that it will not be able to shift to a value orchestration role, and its handset business (while excellent) will no longer garner 75% of industry profits. Where will the high margin businesses develop? If we take a network view, opportunities to create value exist in interaction between clusters (ex. Retailer to consumer, Facebook community to Retailer) and within a cluster (ex Supply chain, healthcare , …etc.).  Within this cluster matrix, l like to take a Clayton Christensen view: “what problems are there that the mobile phone can solve”? which each “opportunity” assigned 5 key measures:

1) TAM (Consumers, $ Volume, Growth, …)

2) Disruptive innovation measure – price/performance (ex. Mobile targeted advertising vs. Coupons)

3) Information Control. Who owns it, how is it obtained, accuracy, privacy,  (impacts pricing power)

4) Key Alliances and stakeholders

5) Execution risk (ex. Compete with Facebook vs. Building a mobile application for a retailer)

Much of Value orchestration is dependent on data. Consumer data is highly fragmented in the physical world, do consumers/clusters want it consolidated? What are the benefits? Where is it stored (node or cloud)?  The HRB quote above painted a picture where “small units of intelligence float freely like molecules in the ether, coalescing into temporary bundles whenever and wherever necessary to solve problems”. Perhaps it is my time as a senior director within Oracle that has ruined my views on data.. but if it floats freely …how on earth can anyone organize it? Doesn’t someone need a directory? for at least one side? How can intelligence be “self assembling” in business?

My firm belief is that we will start a mobile “boom” that will dwarf what we have seen with either the internet, PCs or the industrial revolution. How big? Will at the top of my list for calculating the basis of a “New Mobile” TAM is marketiDescription: C:UserstomDocumentsPersonalblogUS Marketing Spend.JPGng.. With the US alone accounting for over $750B .. how much of that spend is targeted?

Because mobile is at the intersection of both virtual and physical, the network is larger.. it touches every consumer, every business and every “cluster”…  it is therefore many orders of magnitude more complex.  In this dynamic environment, small companies are much better positioned to deliver “focused”, simple orchestrated solutions between clusters.

Examples of Cluster ochestration:

  • Machine-machine interaction (mobile to open hotel room door)
  • Person-Person interaction (health history, alergies to Doctor)
  • Consumer-Retailer interaction (ex Mobile marketing in brick and mortar retail)

As intelligence develops, it will aggregate (ex Google/Facebook). I covered this topic back my December post Building Networks “The network forms around a function and other entities are attracted to this network (affinity) because of the function of both the central orchestrator and the other participants”.  Given that each node and cluster is resource constained.. they maintain connections to a finite number of “efficient” orchestrators/networks. Early networks build very substantial momentum..

Summary

Wow.. this went on too long..  They say a blog over 2 min of reading is a looser.. hey.. you get what you pay for.

Given the mobile device’s unique ability to serve as a point of convergence between the virtual and physical world, a Stage 4 evolution will take place where handsets are cheap and ubiquitous and networks are high speed dumb pipes (both low margin businesses). This Stage may be the leverage point where Apple’s competitors gain differentiation. Perhaps if they had some cash.. and a few bright people they could respond. 🙂

There are certainly many scenarios where stage 4 could evolve from. Orchestration requires both back end “cloud” infrastructure and localized intelligence. Both entail a complex interaction of: data, distribution, platform, cluster relationships, business intelligence, control, regulation, trust, … to deliver value. Companies like Google, IBM, Oracle, Facebook…   should be able to succeed in the central function.  If any of them agree with this blog.. they should actively endeavor to build “interfaces” and standards by which small companies can deliver the localized intelligence.. much the way Facebook has started giving some access to data.

Sorry for size

Comments appreciated.