2012: Remaking of Commerce and Retail

Unlocking the “commerce” capabilities of mobile will reshape the $2 Trillion advertising market and $14 Trillion retail landscape, as new customer shopping experiences are created which leverage consumer data. 2012 will be a key year where retailers, mobile operators, handset ecosystems, banks and consumers make choices which will affect outcomes in future years.

8 January 2012

I’m recovering from a nice Holiday.. successfully marrying of my only daughter.. keeping a smile on my wife’s face (most important) as well on those of my children. I never thought all of that family time could make me look forward to work..  Many of my bank friends seem to be making new year’s resolutions to do something different and I’m fortunate to have them share their opportunities. What are the really big opportunities?

For those that read my blog.. I’ve been very locked-in to the concept of value proposition, and the challenges of creating a new “network” for exchange of value… with my often repeated “every successful network begins with exchange of value between at least 2 parties”. In addition to sharing ideas on new opportunities with former colleagues, I’m also about to take a trip to the Far East to meet with institutional investors.  In Asia, I’m preparing for discussions which will be focused on: What are the REALLY BIG opportunities out there?  Where are the sustainable bets? Where are the risks? My bias in this new year is Commerce.. and the influence that mobile will have in reshaping it.

My Investment Hypothesis:

Unlocking the “commerce” capabilities of mobile will reshape the $2 Trillion advertising market and $14 Trillion retail landscape, as new customer shopping experiences are created which leverage consumer data.  2012 will be a key year where retailers, mobile operators, handset ecosystems, banks and consumers make choices which will affect outcomes in future years.

In the US alone, we spend over $750M in marketing. Any guess how much of that is “targeted” to a specific consumer? Less than 10%.. !!

It’s not that top advertisers don’t WANT to target, but that they have no Platform to do so in the Physical World. In the virtual eCommerce world, there are many facilities for engaging influencing, incenting and paying (for performance). Data is shared from the first click… to the point of purchase across many intermediaries. In the physical world, life is much different. For those interested in this space, let me strongly recommend reading the Booz Shopper Marketing paper (just fantastic).

$14T of retail represents over 22% of the $61T global GDP.. How often do we get to talk about rewiring 25% of the global economy? This is why I’m so high on Google right now. Google currently gets only $14B of the US $750B in marketing spend, and is making strong inroads to the physical POS.  (please see my legal disclosure above).

As I’ve stated before, Retailers are frequently assumed to be a bunch of back water idiots.. as a former banker I admit my mistakes…  this simplified view of retail could not be further from the truth..  Retailers are on the cutting edge of competition. Competition drives data based decisions, customer centricity, daily focus on margins (as they are razor thin) and a toughness matched only in professional sports.

Retailers had to be tough and innovative… after all how do you sell a commodity on more than just price? This week’s WSJ story on Best Buy perfectly illustrates the challenges ahead for many retailers.

“I will buy it in your store…use it while I order another one for 75% less on Amazon and then return the new in the box one at your store,”

The mobile handset is uniquely capable of serving as a bridge between the virtual and physical world.. giving individual consumers access to unlimited information while they shop, not JUST price transparency, but information on quality, fashion, community reviews, availability, AND the opportunity for merchants and manufactures to reach the customer in the buying process BEFORE AND DURING their shopping experience.

What companies have the platform today? Amazon, Apple, Google, eBay, Visa.. all have elements, but the value propositions of each are widely disparate. If Commerce is to be remade, there must be a new value proposition to manufacturer, retailer and consumer. Notice I left out banks..  The problem with virtually every platform on the list below is that they have started life as bank friendly.. which destroys their merchant value proposition. Groups like ISIS are focusing on payments.. and not on a larger mobile value proposition (focusing on advertising for example, also see ISIS: ecosystem or desert).

How will commerce (and retail) be remade? I have no idea… but this will be the year which we see platforms start to gain momentum. You can guess what I’m telling my bank friends…..

Building Networks and “Openness”

8 Dec 2011

I’ve been reading some off beat stuff lately. One book “Weak Links: Stabilizers of Complex Systems from Proteins to Social Networks” was very thought provoking. As Mark Stefik (PARC Fellow) said ‘Something magical happens when you bring together a group of people from different disciplines with a common purpose.’ The combination of people, experience and approaches often leads to unexpected consequences.

As an engineer I like to solve problems.. I usually learn more from mistakes than I do from successes… but it is the learning that is fun. As an investor and entrepreneur I don’t like making mistakes… my preference in the start up environment is to have the learning cycle counted in minutes and days (vs customers and capital). I was speaking with a US Central Banker last month and the concept of “openness” was discussed. A hypothesis was laid out by the Fed “Mobile payments are not taking off because of a lack of common standards”.  The Fed team is very good, the best way to encourage a good dialog is to lay out something radical; as for this hypothesis I disagreed completely. As stated in my numerous blogs: history has clearly showed that closed systems must form before open ones.  I also told the Fed that the problem in US mobile payment IS NOT lack of standards but lack of a value proposition to consumers and retailers. In other words existing payment instruments solve all of my problems.. mobile payment simply does not add additional value (in isolation) compared with existing products (See Mobile Advertising Battle). In order to stimulate a change in behavior (merchant and consumer) there must be a strong value proposition. Two years ago I discussed the implications for broad payment standards in SEPA: Chicken or the Egg and in March of this year I outlined how SEPA has depressed payment innovation in the EU.

Given all of the chaos in NFC at the moment, I woke up this morning asking myself what is the “right amount” of openness and standards? How do successful networks form and mature? What are successful “open” networks? What is the first “open” standard you think of ? TCP/IP? Linux? Java? RosettaNet? EDI? Open Network? Internet? GSM? US Interstate system? SEPA? The Weak Links book opened my eyes to many new concepts, one was on how affinity influences network creation, and another on how few open networks exist in Nature. Networks form around a function and open networks are not necessarily the most efficient.

Scale-free distribution (completely open networks) is not always the optimal solution to the requirement of cost efficiency. .. in small world networks, building and maintaining links between network elements requires energy…. [in a world with limited resources] a transition will occur toward a star network [pg 75] where one of a very few mega hubs will dominate the whole system. The star network resembles dictatorships in social networks.

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. Of course we all know this as the definition of Network Effects. Obviously every network must deliver value to at least 2 participants. Networks resist change because of this value exchange within the current network structure, in proportion to their size and activity. Within the EU, SEPA undertook a rewrite of network rules and hoped that existing networks would go away or that a new (stronger) SEPA network would form around its core focus areas (SCT, SDD, SCF, ..). It was a “hope” because the ECB has no enforcement arm. In other words there was a political challenge associated with ECB’s (and EPC specifically) ability to force an EU level change on domestically regulated banking industry.. given that SEPA rules destroyed much value in existing bank networks, the political task was no small effort. We have seen similar attempts (and results) when governments attempt to institute major change in networks (Internet NetNeutrality v. Priority Routing, US Debit Card Interchange, …)

Mobile Payments Standard?

If we take a look at today’s payment networks what are the biggest problems to be solved? I have a perspective, but its certainly biased. How about payment routing and speed? These seem to be common merchant and consumer concerns. Keeping with an internet analogy, can you imagine if there were no DNS servers to route IP traffic? Every router would have to keep the directory for the entire internet not only of the final destination, but also the most effective route to forward traffic. What if the internet were not indexed? No ability to find information (thanks Google for fixing this).  In the payments environment, the central assets of Visa and MA is 1) A Directory and 2) the rule that EVERY participant must route traffic through them (with a new PIN debit exception in US).

Outside of card transaction’s banks maintain their own directory for routing retail and commercial payments; this is called “least cost routing”.  A key bank service I would propose (note: I’m not the originator of this idea) is a universal directory service mapping e-mail, phone and account numbers.  In Australia, the banks have this today run by my friends at Cardlink and completed under project Mambo. In the US, The Clearing House (TCH) has had the UPick service completed for a number of years.. without much interest.

My thought here, is that rather than facilitate a EU mistake in mandating a change in all rules.. decrease the switching costs between networks so that market forces can take hold. I’m not proposing to take the directory public.. but at least give regulated entities equal access. In Australia the driver was to decrease bank switching costs, also note that Australia has no Signature debit.. just as in Canada.  A common directory could also follow rule that non-regulated institutions could not hold account data (or card number).. Just as I don’t have to know my Bank’s IP address.. I could use another identifier (email, mobile, …) for online transactions. The danger for banks is that this would certainly open up the world of least cost routing to non-banks. Payments would become “dumb pipes”.. which is perhaps what it should be.

Mobile payments is certainly not critical government infrastructure. So what is Government’s proper role? Consumer data protection, transparency, regulatory requirements, equal participation/access..  ? I don’t know the answer. I like the idea of the Government creating a model service for R&D purposes.. perhaps based on Fedwire and letting non-banks have access to it… I also like the idea of a common directory.

ISIS

For 2.5 years I’ve been writing about ISIS.. I’ve always have been a huge advocate.. until lately. What has changed? My position, and that of retailers, is that today’s payment networks are heavily tilted in favor of the banks. The opportunity I originally saw for ISIS was constructing a new merchant friendly network that was an “extension” of the current mobile network which the carriers run (The original business case for ISIS is outlined in ISIS: Moving Payments from Rail to Air).

Keeping with my theme of openness and standards how is ISIS creating a platform for other to invest in? What value is an ISIS mobile payment to a retailer? Yesterday’s blog talked about the complex supply chain necessary to deliver on NFC. Don’t get me wrong, there is nothing wrong about NFC technology.. it is a very well defined specification. But it is complex.. if it was a NEW WAY of doing payments (or better yet commerce) perhaps it should have started a little less ambitiously. The team seems as if it prudently sought to reduce risk, but it also gave up on a central element to its value proposition. My analogy for today is that ISIS project is like Vanderbilt’s skipping steam and going straight for high speed mag lev in 1880…. While the entire country was growing at a 10x pace and he had no right of way..

Big projects are tough in normal times.. but mobile is changing at an unbelievably fast pace. Small focused projects are certainly lower risk when innovating at the cutting edge. Everything is changing.. how could anyone architect an open system in such a fast changing environment? It would seem that technical standards like TCP/IP or GSM were successful because of their ubiquity and distributed control. They could be used by all to create different networks with different value propositions.. which incented millions of companies and consumers to invest.  I just don’t see how MNOs can create a business platform based on NFC. Their best shot may be to work with someone like Sequent Software to create an architecture for 1000s of applications to access secure element data.. instead of the one single CSAM wallet coming out in Pilot Dec 2012.

Your thoughts are appreciated

Previous Blogs (Nokia NFC Ecosystem, ISIS Ecosystem or Desert, Banks will win in Payments.. but WHICH ones?)

ISIS Delay..

ISIS is proving that the NFC supply chain is not workable… at least not without a very substantial customer value proposition. A December 2012 delay to a PILOT may well be the death knell for ISIS… how can carriers invest $200M in a team that won’t see production until mid-late 2013?

ISIS Delay

My last blog on this subject was only 2 months ago.. Headline was “ISIS has 12 months”.  Rumor this week is that ISIS has 12 months to go TO PILOT (Dec 2012). The driver seems to be the UICC chip that supports the SWP SE (Gemalto’s fault??).  Note that my previous nine party chart did not even consider the UICC.. so here is a revision.. (added UICC, MNO, and POS register)…

How would you like to run an industry consortium that had to coordinate a release and a new technology across 12 different companies!?? Oh.. a few other minor considerations as well:  no compelling customer value proposition and against Google? My favorite question to ask anyone from ISIS is what will the application do for me that my Citi sticker won’t do now?

  • Provision over the air? (Who cares)
  • Turn on/off the card/element? (Who cares I don’t pay for fraudulent charges)
  • Offers? (Who cares.. Citi can tie merchant offers directly to card use.. Clovr Media/Linkable)

There are MANY future functions like eReciepts and Item level coupons.. but these are VERY far off because they require retailer participation.

ISIS is proving that the NFC supply chain is not workable… at least not without a very substantial customer value proposition. A December 2012 delay to a PILOT may well be the death knell for ISIS… how can carriers invest $200M in a team that won’t see production until mid-late 2013?   There is no shortage of parties complaining about Google’s approach.. but by taking control of the spec, the architecture, the handset and “TSM” they have eliminated the complexity and have been able to get something to market… and are improving from there based upon REAL customer feedback. So while ISIS will struggle to get a pilot running by late next year, Google is signing up new retailers every week, improving its applications and gaining market experience.

As I outlined previously, carriers started from a basis of control with the NFC Forum’s technical specification. Obviously, the handset has proven to be a platform of digital/physical convergence.   We all see enormous opportunities to re-wire physical commerce with the handset at the core. But today the handset’s “commerce” success is driven by its open nature (apps and connectivity). It is a platform where anyone can build anything within a given set of loose rules (tighter in Apple’s case). In order to attract retailers, advertisers, issuers.. the MNOs had to continue this “open” approach.. but instead have taken one of control. This control approach may have been unintentional as not many organizations have successfully built business platforms (favorite book on topic is Platform Leadership). MNO’s control approach could have also been driven by the desire to securely maintain customer information. Whatever the reason, companies will likely develop approaches (See Square Card Case) that keep information out of the secure element and place it in the cloud. As I related in the Square article.. the success of NFC is far from given.. All that is really needed at the POS is a “key” that key could be a single number/identifier delivered by NFC, your voice or your IRIS.  Keeping all customer information on the phone is rather stupid. One MNO told me this week.. its on the phone in case it doesn’t have connectivity. Well guess what.. stores have the connectivity.. that’s how Visa’s system works.. Stores are not dependent upon the Phone’s connectivity.. but rather their own.

It’s never easy for a Fortune 100 organization to admit that they made the wrong bet.  Globally, there is also a very strong inter-carrier commitment to “carrier controlled NFC” work. All it will take is one major carrier to change course and join Google’s camp to bring down a global house of cards that is NFC.  My guess is that carrier controlled NFC find long term traction in public transit and ticketing perhaps even in government identification. .. but this is 3+ years out before any substantial (>20%) adoption.

Customers.. you want ISIS mobile payments functionality? Go get a sticker.

MNOs.. do you want ANY part of mCommerce? You better move quickly to partner with someone that can get all of this done. Their dance card may fill up quickly. If you don’t move beyond the “control” approach.. you will be relegated to dump pipes.. as thousands of businesses work to get around your controls..   Given the Carrier IQ blow up this week, you have no ground for claiming you would manage privacy better than Facebook or Google.

Apple’s Commerce Future = Square?

My top question for October has been “What is Apple up to” in payments/commerce? It matters to me because investments and strategies have to line up. Is there new risk? Should I be running from NFC? Where do I place my bets?

25 October 2011

My top question for October has been “What is Apple up to” in payments/commerce? It matters to me because investments and strategies have to line up. Is there new risk? Should I be running from NFC? Where do I place my bets?

Data Points (From previous blogs)

  • Apple/iPhone is staying away from NFC…Apple has something brewing that revolves around its iTunes account base.
  • Chase is working with both Apple and Square
  • Square just secured a billion dollar valuation on $3-6M in Rev from one of the best VCs (IMHO) KPCB.. SO they must have some big idea…
  • WSJ Article reports Jamie Dimon is talking to Dorsey on Payment.. what possibly could Jamie be so enthused about?
  • Keith Rabois said he would never have gotten involved in Square if it was just about a doggle and payments..
  • Visa is on board.. so they must have a plan to drive card volume. Visa invested at a time when new mobile  PCI standards were “in flight”
  • The Square doggle is mag stripe only.. (doesn’t work outside US)
  • They are pushing the doggle like mad, expanding distribution to WMT stores this week.
  • My previous blog outlines how Square has shifted into V3 of a business strategy that is about commerce (not payment). V1 was “Payments for Craigslist community”, V2 Small Merchants alienated by terms of today’s Acquirers, V3 Commerce
  • Square card case shows TODAY’s product for working in physical retail. To make this work efficiently (and at scale..) many people have to be “registered” with Square as Payers (to open a Tab). Visa Wallet, and Apple iTunes would seem to be logical extensions to expand this registration rapidly. See Card Case demo Square’s site http://www.youtube.com/watch?v=la0zz-pPEl4
  • As I stated previously, there is no need for NFC… anything that NFC can accomplish can also be accomplished with a single key exchange.. whether that key is biometrics, a loyalty card or your GPS location
  • In this blog 2 years ago (wow I’ve been writing about Square for that long!?), outlines how a commerce process of the future may look like the local country store of the past. I know who you are when you walk in.. ask “would pay like you did last time or put it on your account?”.

Apple/Square – the Anti NFC?

All indications are that Apple has a new “location registration” type of service.. Allowing users to determine “Who” they want to make aware of their presence. I’m sure most of you familiar with Square’s card case can see the immediate link: if you walk into a “registered” store you have given “permission” to be aware of your presence the store will be able to market to you during your shopping experience AND when you go to register it will know who you are based on Voice (Square example), picture, GPS, or some other proximity indicator. Assuming your payment is on file (iTunes/Square) and the retailer is “connected” (to same cloud as consumer): the entire marketing, shopping and checkout process is done without ANY select, scan, tap, swipe or anything … throughout your entire shopping experience. For example, you could be watching targeted iPhone ad videos while shopping with discounts automatically applied at checkout.

Hey I could be wrong … and should have just kept my mouth shut while I go patent this.. but I think this is already in flight.. so my goal is to inform investment decisions. My confidence level?

Square is building this? 60-70%

Apple is participating? 30-40%

This would make Square’s Wal-Mart distribution efforts look brilliant. Give away millions of free doggles to get consumers to sign up.. then leverage this network as the basis for future in store payment network.

Is this really a Killer App?

My response centers around this question: How would retailers (and existing value chain) react?

  • Where is the value to the retailer? In store marketing is not valuable without knowing intent to shop or buy.. or brand preferences..
  • What do Square, Visa, Apple know about physical advertising and retail?
  • What incremental sales with this drive? New customers? Basket Size?
  • Will I lose business if I don’t do this?
  • This use case solves a “payment” problem and an “instore awareness” problem.. What is the benefit to the merchant? Speed? Reduced Interchange?
  • If Chase and Visa are driving this.. retailers will not be jumping over themselves to be first on board
  • IBM has an 80% share registers in top 20 retailers.. Are they going to give up the POS to Square?

On the positive side.. this is certainly MUCH cheaper than NFC.. Merchants: Why should you buy NFC terminals at all? This highlights again why the MNOs insistence in following a “control” model for delivering value through NFC will be such a failure (see related blog). Data should not live on the phone.. but the cloud.

Investment Implications?

  • Be cautious in over estimating the uptake of NFC. It is not a panacea for payment. It is a great tool for machine/tag to machine communication (ticketing, door opening security, RFID reader, music sharing, …).
  • Verifone’s vision of new terminals everywhere should be balanced with a view of no more payment terminals at all.
  • There are some very big bets going on here.. Apple, Kleiner, Visa, Chase.  If you are not aligned to one of the big players you could get stepped on quickly
  • Many opportunities to add value within this “future” scenario.. SAP, Oracle, and other retail experts are well positioned to help retailers
  • Visa and Chase’s involvement make retailers participation less certain… therefore increasing retailer interest in other “retailer friendly” value propositions.
  • My favorite one.. in store bandwidth. Stores are sink holes for radio signals..  Verizon and AT&T could gain control over this entire value chain by selling connectivity solutions (ie microcells) into stores. They can control the content in the phones to a much higher degree.. for example blocking any non-retail friendly site while a customer shops.
  • Government Regs.. We need to start managing who has access to location information in a much more “regulated” fashion.  I’m more concerned about my location information than I am about my payment info. Why? I know I won’t be held liable for my fraudulent card data.. while a bunch of physical thieves could rob me blind if they know where I shop and when I’m gone from my house.  There is an assumption that customers will let this happen. My recommendation is for Square and Apple to spend a little time in Germany..
  • Visa Offers could have a new outlet in store.. unfortunately.. they don’t know how to “sell” offers to retailers..

Make no mistake.. I like this model and think it is brilliant. But others are much better positioned to execute on it.  Starting a network business is hard.. cracking the nut on a retailer value proposition.. harder.

If this is true.. I could be flipping to a fan of Square.. errr… Apple?? I finally see Kleiner’s investment approach at work. As one of their partners said to me “Tom, if we get a great team in place.. they will figure it out… Google had no idea of how it would make money when it started.. they turned out OK “

NFC – ISIS has 12 months…

what retailers do you think are anxious to assist Visa and MA with a new generation of payments that is more expensive than what they have already? Specifically, NFC is a credit card transaction.. carrying a 300-350bps rate. Although there is nothing to prohibit and NFC based debit card.. there are no banks (other than Discover/Barclays) that have stepped into this space. Visa and MA see NFC as the next great driver of CREDIT card transaction growth.

2 Oct 2011

Loads of new press out related to NFC

–          ABI research estimates $100B GDV by 2015 (yeah.. and pigs fly)

–          EMVCo 47 page report on technical standards for contactless payments

–          Visa’s new mandate to retailers.. EMV (+ NFC) by 2015 or merchants bear the fraud loss

–          ISIS Handset Support

–          Launch of Google Wallet

–          PayPal dissing NFC (today)

Having been the first to break the news on ISIS in 2009 (Although I was wrong on Visa involvement… it was Discover), perhaps I should be the first to predict its demise.. UNLESS something big changes.  The problems with mobile money is 5% technology, 95% business model. Take a look at my diagram below… 11 parties that need to execute on a clear value proposition… No wonder MNOs like Verizon are hedging their bets, creating alternate payment solutions (see my Payfone blog).

What company can invest in something it can’t control? That has a value proposition that is unproven? That requires collaboration with competitors? That customers may not want or pay for? Please someone give me an example…

Payments  (in isolation) adds very little value to an overall commerce value proposition. Did you buy your big screen because they took Visa? No.. you chose your big screen TV because it was the right model for you and you expected the merchant to offer you payment alternatives. Most of you reading this would probably have accepted 2-3 options..  The most important value proposition for any commerce network is targeted to the retailer.

ISIS started off with a great retailer value play (see my previous pro forma financials), the Barclays/Discover instrument would have been a winner.. credit the involvement of WalMart with the strategy of ISIS here.. as WMT was key in ISIS’ participation and Abbott’s hiring (former GE Money Exec… GE services WMT’s pre-paid cards). But the card networks found a way to put the screws on… and destroyed a very innovative product.. and their merchant value proposition along with it. To compensate for the ISIS 50 bps “carrot”, Visa has constructed an EMV stick (see above) to force merchants to accept EMV.. (and in essence NFC). Retailers are frequently assumed to be a bunch of back water idiots.. as a former banker I admit my mistakes…  this simplified view of retail could not be further from the truth..  Retailers are on the cutting edge of competition. Competition drives data based decisions, customer centricity, daily focus on margins (as they are razor thin) and a toughness matched only in professional sports.  Retailers know customers like few others..  Few names generate a more intense visceral reactions among retailers than Visa and Mastercard. Today’s card networks are no friends of retail. It was no single factor.. but rather decades of choices all made to favor one group: issuers.

In this environment.. which retailers do you think are anxious to assist Visa and MA with a new generation of payments that is more expensive than what they have already? Specifically, NFC is a credit card transaction.. carrying a 300-350bps rate. Although there is nothing to prohibit NFC based debit card.. there are no banks (other than Discover/Barclays) that have stepped into this debit space. Visa and MA see NFC as the next great driver of CREDIT card transaction growth. Thus, Visa’s EMV moves are meant to accelerate this. Currently MNOs (and ISIS) are being taken for a ride by the banks as a tool to drive this.

Google was brilliant to include a pre-paid card in their wallet to balance the options for consumers, ISIS will likely do the same.  But the conundrum faced by ISIS is that there is no revenue for the ecosystem above without credit card fees and no merchant value proposition WITH them. The answer of course is for NFC to develop a new revenue model and value proposition (see my Googlization post), but building an Ad network is no easy undertaking.. and it even more complex for ISIS since their owners are each undertaking the development of separate ad network initiatives (VZ has equity stakes in Cellfire, mphoria, and a 200 person team).

Now add this dynamic to the complexity of executing against a business model (any business model) across 9+ parties and you see the NFC business enigma. As I stated in Nov 2009, MNOs know how to be successful in payments. ATT ran the most successful private label card of all time.. they have tremendous (non monetary) tools to incent consumer behavior (ex think free unlimited data).  Unfortunately they don’t have experience in working with retailers.. or in orchestrating commerce interaction. ISIS will execute on the charter given to them.. but that does not mean it will be successful.  Having a functioning NFC wallet does not mean that anyone will use it. Particularly if it is disconnected from everything else that I do use (mail, maps, search, Android Marketplace, …).  This is where Google excels. Not only does Google have the best engineers on the planet, they have the best retailer relationships AND customer relationships.

Remember NFC was a construct of the NFC Forum, a group formed in 2004 to design a new protocol that could be controlled by MNOs and Handset MFGs. Again.. it was designed for CONTROL….  ISIS is proving that it has fantastic facilities for control of the secure element, particularly in the US where post-paid handsets are subsidized. What ISIS fails in is a consumer and retailer value proposition.  If they do not find a way to work with other participants, the window of opportunity for NFC will fade. I give ISIS 12 months…

What are the alternatives to NFC? I told a start up CEO this week that NFC is but one alternative to identifying someone at a POS. I could use a card, GPS location, biometric, .. just about any form factor to achieve the same thing (as an example look at Square’s Card Case, or VZ/Payfone). Also.. we all know that locking card information inside the phone is just plain stupid.. It’s how Microsoft worked before the internet existed.. today we are in the world of cloud computing where information lives on the cloud.. (See my previous blog)

Messages for ISIS

  1. Improve your retail value proposition
  2. Get the carriers aligned on the “SUPER” Value proposition… or you will have a wallet that functions.. but no one wants. Take a look at Enstream in Canada for a use case here. Zoompass was the precursor to ISIS….
  3. Move beyond control focus to VALUE focus. Build partnerships which will help you orchestrate commerce. Of course this is not in your charter.. and very, very hard for competitors to do… so this will be a driver in your demise.
  4. You will not get the data on every transaction occurring on the phone.. so give it up now. Both ATT and VZ are ISPs as well as backbone providers, do you keep every piece of data flowing through the internet? Your plan here is FUBAR…

Message for Retailers

  1. NFC terminals will only drive expense growth until there is a consumer value proposition. The only entity that is coming close here is Google. Google does not care about transaction revenue.. they care about value creation.. this is a retailer friendly structure.
  2. Delay your EMV/NFC plans.. The big issuers will not be reissuing cards.. so even if Visa follows through on the liability shift it will only be for cards that could have been validated.. So your risk is of fake EMV cards.. Perhaps if you see an EMV card you just ask for a customers ID..  sound rather simple…?
  3. Ask very simple questions and get clear answers: how will this deliver incremental sales? What kinds of customers will be using this?

My prediction? ISIS and MNO initiatives will be successful in Transit. Retailers will migrate to a new commerce network that steers clear of Visa and MA.

Verizon and Payfone (update)

Message to MNOs. Start with a value proposition to a customer.. NOT with a product. If you can’t deliver the product (which is very likely), then focus on taking a role in orchestrating the value delivery (examples: service discovery, authentication, merchant mobile enablement, community ratings, ) . Verizon’s strategy is product focused… when they loose in products their brand deteriorates and they start to become a dumb (fast) network.

Updated 15 June

WSJ Friday: Payfone and Verizon

I’m trying to imagine life as a Verizon customer. From a customer experience perspective, I have to register my credit card in the Google Android Marketplace for app purchases.. but now I also have to register it again at Payfone if I want to pay for physical goods on a mobile phone.. and again for the mobile NFC wallet (to give the TSM access to the card for registration in SE), I also need to register for Bill to Mobile. Thats 4 different payment types on one carrier.

  • ISIS – Physical Goods at POS through NFC
  • Bill to Mobile – Digital Goods
  • Payfone – Physical Goods in mobile browser
  • Android Marketplace – Android Apps

I doubt if there is much of a payment strategy behind all this.. It looks to me as if Payfone strategy has morphed just in last 2 months, from digital goods to physical goods. Payfone has completely underestimated the merchant integration challenge.  Competing in this mobile browser physical purchase space:

  • PayPal
  • CYBS/Visa Wallet
  • Google Checkout
  • ?Amazon (they have the capability and the user base..)
  • Moneybookers
  • payforit (UK consortium), Belgacom’s BICS, Bharti’s pre-paid card, …

What is the value prop that Payfone will offer merchants? Do merchants really want the digital ecommerce payment process to be completely differently than a digital mcommerce payment process? HECK NO.. little things like fraud, settlement, reconciliation, customer support, returns, … Payfone has no clue on what it will take to run the merchant side (which is why they probably don’t have a reference customer here). Payfone’s team has offered me a chat to set me straight on all of this… which I will take them up on at end of June… I told Rodger that I’ve been wrong before.. and not afraid to admit it. On this merchant piece… perhaps Amex will do the merchant acquisition for them. If this is true then there is a real strategy issue… merchants love for Amex is at the same level as their fondness for the IRS or tax regulations…

Payfone looks great on paper and I’m sure Verizon wanted to get something moving they could control and gain leverage with. Little Sprint is now 12 months ahead of Verizon.. and ISIS. It must be frustrating.

Message to Verizon: the real challenge for you is managing customer behavior.. and creating a well designed payment product that works across all of these areas. You are not a payment organization.. Apple will win this design war on iPhone.. and Google will win it on Android…. Win means delivering real consumer value (and retailer value) in an integrated cross channel experience.  This Payfone partnership will create a real headache for ISIS in merchant integration…. You will have ISIS working with top retailers to integrate NFC … then your Payfone (and bill to mobile) partners requesting another integration for mCommerce… each with separate settlement processes.  I can’t imagine how you will manage the customer communication and marketing…

Message to MNOs. Start with a value proposition to a customer.. NOT with a product. If you can’t deliver the product (which is very likely), then focus on taking a role in orchestrating the value delivery (examples: service discovery, authentication, merchant mobile enablement, community ratings, ) . Verizon’s strategy is product focused… when they loose in products their brand deteriorates and they start to become a dumb (fast) network.

As a side note. I just heard today (need to find the source) that 40% of all mobile purchase transactions were done via wi-fi. This would intuitively make sense as its hard to do this while you are walking around.. and given network coverage of AT&T/ iPhone in NYC alone no one would have the patience to complete multiple screens.

ISIS: Antonym of Nimble?

ISIS – The Antonym of Nimble

Last week’s announcement that ISIS is abandoning plans for its own payment network (NFC Times) is not a surprise. This blog has covered ISIS since 2009 (before it had a name). Now we can add ISIS to the great names in mobile payments: PayBox, Obopay, Firethorne, Monitise, Enstream, …

It turns out ISIS was a Desert.. why have they failed?

  • Business Strategy based on “Control” instead of value.
  • Consortiums are not nimble, MNOs are not nimble, and a consortium formed around a poor business strategy will not be able to adapt without a very strong and experienced CEO.
  • Existing networks and ecosystems did not align with (or support) ISIS initial strategy.
  • Building a new network is an expensive undertaking.. building one without a value proposition is impossible

From my perspective the tipping point that killed ISIS was their inability to exert control over the secure element. Their entire business plan was dependent on this. When RIM announced its SE architecture 2 weeks ago, with Apple likely to follow.. it became perfectly clear that ISIS could not control and provision wallets, cards and applications that access the SE (related blog).

Mobile payments are still firmly in the hype stage. Until a real consumer value proposition develops that leverages the handset’s unique assets, consumer’s data, payment, retailer integration in a way where multiple parties can “participate” it will remain a niche. Getting excited about NFC is like getting Satellite radio in your car.. sure it’s cool and all cars will eventually have it, it may even improve your life.. but there are plenty of alternatives and many people have no need of it at all.

That said, there are many useful software products that could use this technology to deliver real consumer value. Most innovations are either targeted to either the top end (cutting edge performance) or to the bottom end (lower cost) of requirements. NFC adoption will take place within multiple solutions targeting the “top end”, each of which has a strong network effect component. Solutions will succeed either by delivering the most value point-point or through network scale. Payments are but one core service that NFC must deliver on.

From my previous Blog

Globally, MNOs are looking for a platform where Operators can benefit from interaction between consumer and merchant, with flexibility to deal with a heterogeneous regulatory environment. The competitive pressures on Visa/MC are much different then they were 5 years ago (when both were bank owned). The network fee structures and rules were written with banks and mature markets in mind. …

All of this leads to the case for a new “Mobile Payments Settlement” network, a network which will alienate many banks. I expect to see Visa roll out the initial stages of this network in the next 2 months with an emphasis on NFC. Quite possibly the best kept secret I have ever seen from a public company. I’m sure many Silicon Valley CEOs are crossing their fingers (with me) on this, as a “new wave” of innovation is certainly close at hand that will drive growth (and valuations).

NFC Update – Zenius/InsideSecure

I met with the Inside and Zenius folks last week, and am impressed with both teams. Their mutual objective is to make development of NFC applications “easier”. Both have developed a chipset independent framework (common API layer) which creates a layer of abstraction between an NFC application (ex wallet) and the underlying hardware.

7 March 2011 

Previous Blog: OpenNFC 

I met with the Inside and Zenius folks last week, and am impressed with both teams. Their mutual objective is to make development of NFC applications “easier”. Both have developed a chipset independent framework (common API layer) which creates a layer of abstraction between an NFC application (ex wallet) and the underlying hardware. Both have also developed example applications that leverage this API layer (wallet, ticketing, loyalty, … ). My summary thoughts on the 2 teams are I like them both. Inside has expertise from hardware through software delivery. Zenius’ expertise extends from POS to Handset across multiple hardware architectures.

Comparison

Zenius

  • NFC API framework
  • Chipset independent (proven)
  • Vendor independent
  • Handset Applications
  • POS Applications
  • MNO experience

Inside

  • NFC API Framework
  • Marketed as Chipset independent (no proven)
  • Handset NFC Applications (5 of them)
  • Discourages Multi SE environment
  • Discourages Application Development (Use on of its 5 Applications)

What I struggled with was Inside’s insistence that there should only be 5 NFC applications. In other words, its NFC middleware layer was only for its own internal use to ensure that its applications work across all (competitor) NFC chipsets. The implication is that there will only be 5 NFC applications… for eternity. For example, ISIS selected the C-SAM wallet that sits on top of a custom built NFC stack.  In the Inside model, ISIS would need to jettison both CSAM and its custom middleware.  (Yeah, I had the same reaction).

Zenius has a much more mature model, driven from their legacy working within Verifone and VivoTech. The Zenius guys had to make their applications work across multiple hardware solutions, and hence developed a framework that is now productized. They have also developed 5 standard application, that are “reference implementations” of their APIs, you can use them in a white label fashion, customize them.. or take them apart to see how they leveraged the API layer. This is a better approach hands down.

Inside’s approach seems a little unrealistic, and could be perceived as a “land grab”.  What do I like about Inside’s OpenNFC? The middleware and their end-end experience. In the end they are driven by chipset volume.. my guess is that they would be willing to give away OpenNFC if it would drive their chip sales. Problem is that giving it away may only commoditize their core product, hence they would be tempted to ensure that their product “works best” with OpenNFC. This is one reason that middleware vendors (MQ, Tibco, WebMethods, ..etc) developed separate from software companies.

Given that developing native NFC applications is difficult, the experience largely sits within companies like: Inside, NXP, Verifone, VivoTech, Device Fidelity, Tyfone.. .  People within these organizations all know each other.. after all it is a very small community. I asked them how many of their colleagues are at Apple. The answer across the board is that they don’t know of anyone.  This tells me that Apple is probably more than a few months away from launching an NFC wallet, or that they are dependent on a vendor (?Gemalto) for all development.

Since ISIS has already completed development of its own NFC wallet (not on iPhone), what are Apple’s plans?  I’m told that Apple wants a wallet tied to their 200M Apple accounts, this could be mere speculation, but it seems logical. I’m also told that Apple has their own NFC wallet. If Apple does indeed have an NFC application, it is something they have procured (licensed and modified) from Gemalto.  This is not a bad thing, particularly if Apple is more focused on hardware architecture, and plans for managing secure elements (SEs). The first wallet will undergo significant testing, through a new hardware and software stack. They must have something they control (not ISIS) and that is tested (Gemalto) to reduce complexity. Apple will likely need additional applications, but they must start somewhere.

All of this just spells further trouble for ISIS, who was hoping to focus more on POS issues now that they have a working wallet application. If RIM and Apple are successful in keeping control of the NFC wallet, ISIS can only hope to be another “card” in the wallet… one that speaks Discover ZIP initially. Quite a different value proposition than what they started with 6 months ago.  

For Apple, this allows them to strike a strategic relationship with a card issuer (like Chase) who will likely invest in both marketing and POS infrastructure. I’m sure that Apple’s plan is to also integrate iAd… although it can’t possibly make it for 2011 (my guess).

OpenNFC – Game Changer

OpenNFC has a tremendous impact on MNO NFC business models. 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

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).

ISIS Platform: Ecosystem or Desert

Banks have let small technology vendors define the market place, and have not demonstrated any leadership in driving the market forward; really makes you appreciate Dee Hock’s creation of Visa — how did he do it in such dysfunctional organizations?

3 February 2011

In yesterday’s post I discussed the business strategy behind NFC. I had a great note from head of mobile from one of the large banks this morning. Q: How did Visa and MA loose all of their momentum in contactless? How did we (banks) let this happen?

Banks have let small technology vendors define the market place, and have not demonstrated any leadership in driving the market forward; really makes you appreciate Dee Hock’s creation of Visa — how did he do it in such dysfunctional organizations? 

Visa/MA have made the same mistakes as banks plus they selected a technology which pushed the computing platform to a smart card via an NFC smart card, and then proceeded to do nothing to control the use of that technology, nor did they focus on key merchant categories like retail, grocery, and fuel to implement NFC infrastructure

Banks… here is the good news.. the ISIS team does not seem to be building a platform.. but a payment solution. MNO activities within ISIS:

  • Consortium
  • NFC Platform – “rocket scientist” engineers that developed it.. really
  • Retailer Relationships
  • Discover/Barclays relationships
  • …etc

All of this may be for naught if they can’t build a team capable of running a software platform business. They are appropriately focused on NFC payment, as it is the core of their value proposition and the reasons that the carriers created the consortium. But they have a mile wide hole in their business plan if they don’t start defining how other parties can invest to build out the ecosystem. It takes someone with solid experience to run a platform business (MSFT, Apple, Oracle, Google, ). Payment is just one element.

ISIS today looks like a Disney World with one exhibit.. Google and Apple understand the ecosystem dynamics of building a platform.  If Apple succeeds, all of the investment that MNOs and the GSMA made in building NFC will be lost, or at least permanently stunted.
ISIS Ecosystem Choice

The guiding lesson my teams have learned in helping create networked businesses is that scale is everything. As stated in the Oct 2006 issue of HBR,

[Network] leaders can leverage their higher margins to invest more in R&D or lower their prices, driving out weaker rivals. As a result, mature two-sided network industries are usually dominated by a handful of large platforms, as is the case in the credit card industry. In extreme situations, such as PC operating systems, a single company emerges as the winner, taking almost all of the market. Platforms serving two-sided networks are not a new phenomenon. … New platforms have been created (Google, for example, links advertisers and Web searchers) and traditional businesses have been reconceived as platforms. Yet for all the potential they’ve spotted, platform providers have struggled to establish and sustain their two-sided networks. Their failures are rooted in a common mistake. In creating strategies for two-sided networks, managers have typically relied on assumptions and paradigms that apply to products without network effects. As a result, they have made many decisions that are wholly inappropriate for the economics of their industries.

Problem I run into is that early stage companies cannot take advantage of common infrastructure until there is a critical mass of users (and specialization). Usage drives volume, volume drives profitability, profitability drives investment and specialization, specialization drives innovation, innovation drives more volume…etc. However, prior to this critical mass, where is value creation in a “new” Platform (great book Platform Leadership)? In a “new” payment network? Today, there are early stage companies failing because they bet on NFC too early.

Platform Leadership laid out a very nice framework, but was it for Software platforms only? What about Business Platforms? What is a Business Platform? Is Microsoft/Intel (WinTel) a Platform? Ecosystem?  Channel Masters? The great thing about the high tech space is that it is lightly regulated and operates under very well defined standards. A story is useful to draw context for the general audience of this blog.

Back around 2000/2001 one of my teams at Oracle ran the supply chain exchanges and also helped bring new Oracle products to market. Within HighTech, my solution architects worked with customers (ex. Cisco, Sony, TSMC, MOT, … etc.) as they progressed through standard like RosettaNet. Cisco was a huge proponent of RosettaNet, they viewed real time supply chain information as a key to their profitability (avoid the bull whip effects). The Rosetta PIP standards were crystal clear, but the business case for the manufactures was not. Although they certainly wanted updated demand plans from Cisco, they did not want to provide status of Work in Process WIP). If Cisco had the WIP information, they would then have the channel intelligence to reroute work if a foundry or CM was falling behind. Hence the commoditized suppliers resisted implementation of the WIP standards. Cisco eventually succeeded, as WIP became a competitive differentiator which Cisco was willing to pay for. Cisco is a very strong Channel Master; it owned the platform, the orchestration and the source of demand.

The reason I draw out this story is that network dynamics and incentives are a very complex.. but someone MUST HAVE A PLAN. Channel Masters have the best track record in creating business models where multiple companies invest and participate. Cisco is an example where it is channel master, owns the platform, dominates the ecosystem and is source of direct customer demand. Companies that follow this model (US Gov, Apple, Boeing, Airbus, Mitsubishi, Toyota, Ford,  …).  Some business platforms are completely dependent upon an open, broad participation for growth (Google, Apple AppStore, Java, Wikipedia), while others are closed and regulated (banking, communication, defense, …).

My Advice to start ups:

  • Do not assume ISIS will be successful
  • Do not invest in any ecosystem until there is profiability for the Channel Master and AT LEAST one other group
  • Look beyond US for opportunities. UK and Singapore have excellent consumer dynamics and may be an ideal location for early stage companies.

What will ISIS be? Closed or Open? Successful or … ?