Tag Archives: apple

Digital Goods: Where to Invest?

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 17 Feb 2011

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

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

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

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

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

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

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

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

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

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

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

Feedback appreciated..

Mobile Apps will Die

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16 February 2011

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

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

Let me start off with 2 stories

Story 1 – 1994

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

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

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

Story 2 – Fat Mobile Applications

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

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

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

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

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

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

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

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

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

Excellent TechCrunch Article on HTML 5  Feb 5, 2011

Apple and NFC

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26 Jan 2011

Today’s Article in TechCrunch: Apple Aims to take NFC Mainstream

Previous Blogs

To summarize from my previous blogs (regarding Apple’s NFC moves)

  1. Not about payment but about advertising. The mobile device will be the top advertising platform for the next century. It provides a unique opportunity for convergence of the online and physical worlds (with the commensurate customer data). In the virtual world there is a “click” by which google can bill. There is also an “order” by which online retailers track channel advertising effectiveness. Apple’s moves in NFC represent the combination of the click and the order AT THE POS so that advertising effectiveness can be managed. It is ALSO a platform for many, many other services through which Apple SEEKs to control (and monitize).
  2. Apple’s desire to control the secure NFC element is not aligned with carriers (in the US) or internationally. How will Apple’s NFC integrate with the SIM? Will they follow the GSMA approach? Most interesting is whether Apple will support Single Wire Protocol /UICC model or will it have a unique architecture (SE NFC) with Apple acting as TSM and managing the secure applications outside of the SIM?
  3. Apple has 4 separate payment infrastructures today: Legacy Apple Store, iTunes, App Store and global treasury. They are indeed building a new payment infrastructure to support their wallet. Rumors are they are working with a big bank (?Chase?) as well as considering acquisition (ex. GlobalCollect). It seems that they are confident that they have capability to support US market rollout.
  4. TechCrunch is well off base in its assertion that the Debit interchange provides an opportunity for Apple. Actually, the reverse is true (in US Market). As discussed in the ISIS blog above, the key for NFC adoption is merchant POS infrastructure investment. ISIS is working with several large retailers to subsidize POS infrastructure. ISIS is doing much heavy lifting in its payment system incentives. Discover/Barclays relationship allows ISIS to build a merchant friendly value proposition and gives ISIS a unique ability to “control” the NFC/PCI certification process. Given that Apple is currently outside of ISIS, it must have another payment network to support it at the POS. Apple has typically partnered with Visa (given that MA has partnered with RIM this would make sense). In either case the merchant transaction costs for an Apple/NFC transaction will be higher (Visa controls the MDR) and Visa will control the NFC certification process. Apple may create a package of marketing incentives that will offset the merchant costs, but marketing effectiveness will be poor in the early stage (prior to NFC at POS). A classic chicken and egg problem.

Take Away for Investors/Start Ups

  • Apple will be a very, very hot platform for mobile applications.
  • Do not assume that there will be substantial payment volume in next 4 years
  • Assume there will be iAd “advertising views” but few mechanisms to track effectiveness until payment is captured
  • Important: even after payment is captured, the item detail will not be available to Apple.  Apple will be able to track that customer clicked on iAd, and visited store, but NOT what item was purchased.  There are a few companies addressing this… but not going to spill the beans here as I really like this space.
  • Apple’s ability to capture mass media spend will be driven more by Steve Jobs and the demographic of the iPhone user base.
  • Apple will have continue w/ interim CPC model on iAd until tracking through POS.  They will likely attempt to develop a couponing system, but bar codes on iPhones are viewed very negatively by retailers.
  • Expect to see many “four square” like start ups which try to leverage store visit check ins. But less than $2B in marketing spend shifting to platform until POS integration.
  • Look for Investment hypotheses that align to Apple core services (acquisition/exit)
  • Payment will take some time, DeviceFidelity spent almost 2 years in certification with Visa. In short term look to complimentary services. Examples
  1. NFC to Open Doors
  2. Physical advertising with NFC (NFC in a store display through coupon redemption)
  3.  NFC “Four Square” like Check In (ex shopkick)
  4.  POS Infrastructure (VivoTech, Verifone, Vending Machines, …)
  5. Retailer friendly applications that attempt to marry iAd data with retail POS data (think KSS Retail, DemandTec, ….)

Apple and Google after Boku?

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2 Nov 2010

TechCrunch: Apple’s next strategic move

Yesterday: AT&T inks deal w/ Boku

http://news.cnet.com/8301-13577_3-10265243-36.html

What is Boku’s core asset? Technology? MNO billing relationships?

Hope that Apple and Google look long and hard at the MNO contracts as the “secret sauce” that has driven Boku’s growth. Boku’s MNO friendly approach and neutrality allows any customer to buy digital goods and charge it to their carrier bill.  Neither Google, nor Apple would seem to have a strategic fit here. Why would carriers allow Google/Apple to bill to goods to their customers? Or perhaps I should ask at what cost will carriers allow this to happen?

All of this is even more relevent as ATT/Verizon/TMobile/Discover,.. etc. build their own payments business.

Boku is a great business, but it operates on a precipice much the way PayPal did in its early days.  Carrier billing can certainly be  a much more cost effective infrastructure for mobile digital goods purchases. But what drives this efficiency? Isn’t it the carriers and their relationship to mobile customers?

On the “buy side” digital goods stores use Boku because of its independence. So if Apple buys Boku will Android still support Boku payments (http://www.boku.com/android/)? I do think Boku is in play.. but the real acquirer may look more like the Mercury NewCo than google.. as the MNO synergies are the core of the Boku business model. Unfortunate that the Mercury NewCo still has no CEO.

Mobile Advertising Battle: Beyond the Internet

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10 June 2010

Apple is brilliant!

Having just read today today’s WSJ Article- Google Blasts Apple on iAd Rules, a few random thoughts started to coalesce (which doesn’t happen as often as it used to) into a new ‘‘investment perspective’ on mobile advertising.

Yesterday Magna estimated that online advertising will climb 12.4% in 2010 to $61.0B and surpass $100B by 2013. For perspective, AFP reports that advertisers will spend $59.6B on TV ads and around $600M on mobile advertising (eMarkerter, $1.3B by 2013). The growth here is just astounding, there is little wonder for the transactions over the last 3 years:

  • MSFT aQuantive $6B (May 2007)
  • Google DoubleClick $3.2B (April 2007)
  • Google AdMob $650M (May 2010)
  • Apple Quattro Wireless (Jan 2010)

In my experiences as global buyer, online was by far the most cost effective way to acquire a customer (with SEM the most cost effective). From my perspective, Online Advertising brought a solution to the challenge faced by marketers for decades: data. Finally I could relate marketing spend to customer acquisition. Marketing went from throwing a blanket.. to a shotgun.. In 2005-2007 this shotgun was very hard to use.. particularly outside of the US. Although most agencies were well versed in spending through Ad Networks for display ads, few had any experience in SEM across search providers. Those Agencies that did still did not provide tools for my teams (buyers) to calculate CPA (determining which ads resulted in customer acquisition). Hence, large companies had to develop their own internal expertise or manage their spend directly with a chosen few suppliers (eg. GOOGLE). Internal marketing thus took on the form shown below.

The Ad industry recognizes that the ability to track a customer is key to measuring effectiveness, target ads and thereby key to greater marketing spend. There are a number of technical solutions which have developed over the last 3-4 years, tagging customers with cookies is all something we are familiar with.  Apple’s strategy in defining standard for “tracking” is challenging Google’s unique position as the “starting point” of a customer’s online activity. It moves the starting point to the iPhone device. This is a brilliant move by Apple given its 50M iPhones (and 30M iTouches), particularly when you look at the demographic of the owners and the media capabilities of this killer mobile appliance.

Apple’s plans to take ownership of the iPhone’s “Ad Ecosystem” will not end with these standards. In the online advertising model, the objective was an online acquisition. In the mobile ad model the objective is for either an acquisition online or at a physical point of sale (POS). The mobile device is in a unique position as a point of convergence between the virtual and physical world. In this model the iAD/mobile market expands from mobile advertising (as a sub category of online advertising) to generating store traffic at the POS. The challenge for a iAD at POS is similar to the “customer tracking” challenge described above.. how do I know the customer went to the store? Answers: coupons, payment, geolocation, …

Expect Apple and the MNOs to become very active in linking mobile advertising to these activities (ex Apple’s NFC patent, MNO prepaid consortium). The linking of card data to mobile advertising (consumer behavior and preferences) also provides a tremendous opportunity Banks/Issuers to monetize consumer information (see Googlization of Financial Services).

We may be seeing the beginning of a seismic change in advertising spend, and the way consumers are tracked and targeted. The “addressable market” for mobile advertising should not be viewed as a subset of online spend, both because of POS opportunities and the media richness (and now multi-tasking) of the iPhone. Apple’s strategy is brilliant, I would imagine them taking a regulatory position that all ad networks are welcome to work through their standard…. Apple is protecting customers’ privacy.

Related Content

April 2010 online ad spending report

Thoughts appreciated