Tag Archives: google

Apple’s Commerce Future = Square?

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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…

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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.

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..

Google/ZetaWire

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22 Dec 2010

TechCrunch – Google Acquires ZetaWire

Why did Google acquire a 3-4 person Canadian company with no customers? The answer seems to lie in its patent application

… quite an interesting read. A ubiquitous wallet, online and mobile that provides for direct communication (bluetooth, Wi-Fi, NFC, …) to other wallets and POS terminals. Interesting vision.. google as center of the mobile universe…. who would have ever imagined. 

From a payment perspective, I thought paragraph 271 was rather interesting

[0271] Because the coupon and advertising system is integrated with the payment system, it is able to target and deliver advertising on an individual basis rather than on a demographic basis. The payment system has a complete record of all the purchases ever made by a user, and because the payment system is also integrated with a social network, it can also know the purchases made by all of the user’s friends. In addition, it has access to many other streams of data providing information about a user such as the user explicitly entered preferences and wish lists, which coupons the user’s friends have shared, which coupons the user currently has, etc. The system is therefore able to build a much more accurate user profile than standard advertising techniques, and this user profile can in turn be used to deliver advertising which is customized on an individual basis.

This seems to indicate a significant gap in the understanding of the applicants surrounding financial transactions (and data).  Merchants hold on to item detail information, the payment network receives merchant level data.. but does not get item information. ZetaWire attempts to address this gap by inventing a “coupon authority” entity in Paragraph 264.

All information related to coupons and their definitions is managed by a coupon authority, which can be an integrated subsystem of the transaction authority 102. All instances based on the coupon definitions are minted by the coupon authority. Whether coupons have been applied to transactions is recorded by the coupon authority, as are coupons’ chains of custody from the time they are minted to the time they are spent, including all data related to how and when they were share

For those of you unaware, merchants are rather stingy with their store data. The Visa’s team best effort here is with Monitise and the new iPhone application “Visa Offers” (link is my related blog). It results in a coupon with a bar code and you show your iPhone to the cashier. How does google intend to integrate to merchants and receive store level data? I can’t imagine Amazon being excited about this.. or Wal-Mart in that matter.

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