Walmart – Banking and FinTech

Imagine a world where bank accounts don’t matter. You select services that solve your problems when you have them. Walmart (and Amazon) are unbundling banking.

As always pardon the typos

It seems like only yesterday that 30 members of Congress wrote the acting chairman of the FDIC to stop Walmart Bank.

“Wal-Mart’s plan, to have its bank process hundreds of billions in transactions for its own stores, could threaten the stability of the nation’s payments system,”

30 Members of US Congress, March 2006

Of course, we all know that Walmart pursued a different course to deliver services. Partnerships (MGI, Moneygram, Paypal, …) and banking in a box (literally an isle with prepaid cards). Most analysts discount or “write off” Walmart’s achievements in financial services.  Given Walmart doesn’t break out financial performance of Money Center, analysts are left with the tea leaves of MGI and GDOT reports. There is little doubt that comparing Money Center financial metrics to tier 1 banks would leave most unimpressed. However, Walmart has created a portfolio of banking services that supports their overall retail strategy and creates overwhelming loyalty amongst their core customer base.  

Continue reading “Walmart – Banking and FinTech”

Rewiring – Part 2: Walmart+Goog, Amazon+Whole Foods, …

I’m taking a rather abbreviated approach to blogging today.. as most of my key points have more detail in my other posts. I’ll just link to my old posts and focus on a few new thoughts. Continue reading “Rewiring – Part 2: Walmart+Goog, Amazon+Whole Foods, …”

Google Creating Platform for a New Mobile ECONOMY

16 March 2015

How can Google, Samsung or anyone else ever hope to catch Apple? It depends on what they are chasing!

My view is that Google has just begun a major transformation to the physical (offline) world with Android as the key enabling “platform” (beyond search to orchestration) for a new business network. This transformation involves 5 primary vectors:

  1. Enable Android as the secure platform (SE Linux, Trustzone)
  2. Create participant incentives for commerce “network” to invest and transact on “platform” (Advertiser, MNO, Bank, Retailer, …)
  3. Improve physical world insight/data collection to enhance targeting and attribution
  4. Capture and manage consumer identity
  5. Create/enhance consumer engagement platform for commerce

Mobile Industry vs. Mobile Economy

Apple is the #1 company in the world. (A very BIG period). Apple’s position is well earned through focus and hard work. Operating as a  consumer champion that captures a mind numbing 93% of the mobile industry’s profits.  The most obvious question to address in this blog: what could ANYONE do to dent this? (operating from a basis of under 7%). In other words, what could Google do that would possibly matter?

Answer: The “Mobile industry” is not what Google is chasing (nor are Amazon, FB, Twitter, …). “Industry” is an old world classification that does not account for most aspects of the MOBILE ECONOMY (advertising, beacons, shopping, shipping, social, payment, identity, …etc). The mobile economy is about commerce. Perhaps my favorite “stat of the year” to exemplify the impact of mobile outside of the traditional “industry” came from January in Tech Crunch. Amazon’s business has shifted from 5% mobile to 60% mobile in 5 years!! (see Convergence Blog for more detail).star network

As mobile and IOT encompass ever larger roles/touches which impact our behavior, Google is moving to support both: Android as the embedded OS (connected everything) and Google core as the center of commerce (the orchestrator).  This blog focuses on mobile commerce and I will try to outline a few of Google’s strategic moves that are redefining the mobile economy.

Google’s core is centered on connecting businesses  and consumers, delivering services to all.  At the center of this star network is the indisputable “data” utility which becomes more efficient with every insight they gain on both sides (consumer and merchant).  Today millions of businesses and billions of consumers are investing “energy” to connect to Google (all with unique incentives)

Businesses, Banks and Consumers are all wondering if the beautiful simplicity of Google’s bright shining star [network] is a Faustian Bargain, much worse than Apple’s walled garden. Google’s position today is quite a feat given its humble beginnings as a free Open Source mobile OS that Google bought in 2005.

How is Google building platform and network? Moving to a model of shared incentives and partnerships?  Before we go deep here, let me first attempt to paint the picture of Apple’s dominance (and weakness).


Apple’s success is completely driven by the consumer, logically this means their organization and investment are focused on delivering great consumer products which operate within a giant walled garden. This walled garden works well in a small world (individual’s control: telephone, music, calendar, pictures) where Apple can control, but not very well in coordinating interactions outside of the garden. Stated differently, Apple’s approach of “my way or nothing”, means it has few friends.

As I outlined 2015 Predictions blog, competition is no longer about camera resolution, storage, and screen size, that enable you to manage items in your small world.  The visible (obvious) attributes of mobile competition have become a commodity; as well as the small world problems that your phone solves.  My view is  Apple’s greatest assets are consumer trust and its unique ability to change consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). These assets allow Apple to assume a leading role in connecting and orchestrating consumers in the real “connected” world , however they are 5 years behind Google, Amazon and Facebook in their ability to execute here.

Why is Apple falling down in IOT/Connected Commerce? Apple has 4 primary strategic weaknesses: 1) it does not partner well (closed network and proprietary standards) and 2) it relies primarily on hardware for revenue, 3) its entire organizational culture and focus is on hardware 4) it locks consumers into its walled garden. Today pointing out these weaknesses is like telling Peyton Manning that his singing was out of tune, or Albert Einstein’s flaw as dancing. These shortcomings just don’t matter in a world where Apple is 3 years ahead of everyone else in profitability, quality, loyalty, integrated OS and Hardware.

Apple’s business model is perhaps the best example of how closed networks win through the domination of a benevolent “channel master” (see iPhone 6 – Apple’s Strategic Opportunity). Cisco, Microsoft, Intel all operate in this model. Apple’s star network is much smaller (ie connected business) but its bonds are much stronger. However, their success may become a hindrance.. as merchants, banks and others want to “own the consumer” too.

Compared to Apple, Google’s world is much more democratic, it wins by delivering value through customer choice every day (search, maps, mail, play, HCE, …).  Google is a commerce enabling, which tilts toward the consumer (on the phone) and toward the merchant (in advertising). Where Apple has a walled garden; Google is a semi open platform that supports many gardens and clusters.  Where Apple’s business is driven by hardware margin; Google’s is driven by daily consumer and merchant choice. Where Apple delivers value to consumers and itself; Google delivers value to every merchant, bank, MNO and almost every consumer (even on iOS). What other businesses are enablers of consumer and merchant? My list is fairly small…

Apple’s inability to make the iPhone work outside their garden, means that they are dependent upon device only margin (currently a fantastic business model). Critics will point out that Apple runs a fantastically successful App Store Platform that is 8x-20x more profitable than Google’s (with less than one quarter of the handsets).  However this is Apple’s walled garden.. where Apple made 30% from $2B from App store sales benefiting 500k odd top app developers, Google’s US Ad sales last year were $30B driving at least 20% of $185B in US eCommerce Sales. Google’s role was much more impactful to the overall economy (and almost all businesses).

Platform is turning out to be an opportunity lost for Apple. The iPhone 6’s security has made it the first “convergence device” with the ability to broker interaction in virtual world and the physical world (NSA, CIA and everyone else are still working to break industrial grade security). Yet Apple has no plan to leverage this identity management outside of their platform (see Brokering Identity), or even use basic identity information to assist banks with identifying ApplePay fraud (until very recently).

How to combine assets in the new Mobile Economy?

We need collaboration! The last 10 years has seen every major fortune 100 build big data facilities that work with nothing else. Banks, MNOs and others have all invested billions in an attempt to build an advertising business to rival Google’s. JPM Chase has a new data division on par with the investment bank, Verizon has built PMI, Walmart has WMX. All are constrained by their partial views of the consumer. Advertisers are challenged to work within these new proprietary efforts. The market need surrounds incremental insight engaging consumers in the channel which they prefer .. which means combining data.Data options

US MNOs spent over $600M+ trying to make their NFC play work. As my good friend Osama said at a recent MNO event “in order to create value sometimes we must let go of the assets we treasure most knowing that value is only created when they are combined with the assets and interests of others”.

Google provides a massive closed market (Ad Words) with unsurpassed consumer insight and trust. No company can choose NOT TO participate in Google’s economy, after all advertisers and retailers must go to where consumers are (not where they want them to be). Google operates in discovery, awareness, engagement, selection, sales, delivery and support.

Google is perhaps the only company in the world that is both loved and feared by merchants, banks and consumers. Particularly as their traditional open source, closed market, and “do no evil” approaches become more proprietary and less transparent. Google’s insurmountable advantage is in using data and insights within its own organization, where everyone else must be diligent with sharing (externally).

Today that fear is not well placed. Few understand just how myopic Google’s current data dominance is. While Google knows most about you online (search, mail, maps), they know very little about you in the real world. Google indexed the internet to create a common directory of public data, yet it has very little insight into private data (even your actual identity).  Facebook, Apple and Amazon all have far greater consumer identity insight.  Physical world (off line) data is of far greater value than online data, and online eCommerce sales are only $185B (US) comparted to $2.4T in offline Commerce.


Perhaps it’s easiest to start this section by outlining what has changed in the last 12-18 months?Google economics

As stated in intro paragraph, I believe Google has begun a major transformation to the physical (offline) world with Android as the key enabling “platform” (beyond search to orchestration) for a new business network. This transformation involves 5 primary vectors:

  1. Enable Android as the secure platform (SE Linux, Trustzone)
  2. Create participant incentives for commerce “network” to invest and transact on “platform” (Advertiser, MNO, Bank, Retailer, …)
  3. Improve offline insight/data collection to enhance targeting and attribution
  4. Capture and manage consumer identity
  5. Create/enhance customer engagement platform for commerce

Android as Secure Platform

Android is transition from open source Linux to SE Linux (which was oddly enough created by the NSA).  One of Androids major shortcomings was its dependency on OEMs (minimal say on hardware). While Apple worked to create innovations like touch ID that is stored within the secure enclave within the A7/A8, Google had to work with prime OEM vendors like ARM to build the equivalent (both Apple Secure Enclave and Google’s new equiv are based upon ARM’s Trustzone/TEE).  Android is making big bets in security, as managing information (and authenticating consumer) is key to orchestration (see  Authentication – A Core Battle for Monetizing Mobile).

Poor SamsungPay. These guys obviously don’t read my blog or they would have clearly seen the implications of Google’s new MNO deal. SamsungPay will not be pre-loaded onto Samsung’s own phone. Samsung not only lost in payments, but also in owning a proprietary security construct that secured the token (Samsung’s proprietary Arm TrustZone implementation). Even if a consumer loaded SamsungPay onto their phone, it will not work without Samsung leveraging the new Google/ARM firmware for secure credential management.

Apple’s biggest lead (with no apparent threat) is in touch ID. While SE Linux and Secure Storage are important… you must know WHO is coming in the front door. The Android approach seems to be more about behavior and forensic identification than biometric.

Incentives for participation

In 2011, the US carriers wanted an estimated $3B from Google for the “rights” to NFC (and the secure element). Google correctly responded.. “how about we figure this out together and see if we can make it work” (skin in the game approach). Last month we saw Google’s purchase of ISIS/Softcard for $60M with a new strategic partnership, with unknown revenue share, and unknown mandatory Android features (ie Wallet/Play/ ?) with the Carriers that redefines the “secure” standard of a new Android platform.

Whereas Apple has complete control over every aspect of iOS. Google has created a network for revenue/sales. Retailers advertise/engage/create, MNOs rev share, Banks manage payments.  You can only guess which platform Banks and MNOs would prefer to invest. This common platform may be a turning point for collaboration and Commerce 3.0 (my year of partnerships).

Offline insight

Google’s mission is to use the phone to cross the chasm into offline. The reason a new platform is needed has to do with offline data. For example, Mobile advertising will never work without an understanding of intent and behavior. This [private] information is locked up in millions of businesses (with a copy at the NSA).  data evolution

Today’s data business is just insane. Take a look at someone like CVS, Catalina is one of my favorite data companies (along with ADS), and Catalina works well with Nielsen to target and measure television ads. However they don’t work well digitally, thus CVS has to provide Datalogix (now Oracle) will all of it loyalty data (your SKU level purchase data) to play with Facebook (see my blog for background). Can you imagine having all of your data in multiple locations? Trusting these aggregators use it appropriately? Combining is with their proprietary models and other external data sets? What are they “gleening” from this data?

Google’s approach is to own the data and insights created from their services. Google now wants to create mechanisms to “share”.. the problem is that this “sharing” involves giving data to Google and getting customers back. This allows Google to create great experiences, but the price for data owners is loss of control.

Logically, nothing in biology or in capital markets has this amount of centralization. The title of this section is “combining assets”, is the only answer to combine assets giving them to someone else for unstructured use? This is what my NewCo Commerce Signals does: providing the plumbing for federated data where data owners retain the control over their data, determining not only who they should share data with, but also for what use (next blog). I’m fortunate to have a few big retailers, banks and MNOs that share this view (within Commerce Signals).

Capture Consumer Identity

Remember when you purchased that new iPhone? You couldn’t activate it until you created an iTunes account. That iTunes account required a credit card. What a brilliant Apple move!!  This year Google will finally catch up, as I believe a key facit of new MNO agreements is to make the Google Play account mandatory (with CCN/Token).

Knowing the identity of the consumer is important, authenticating them is quite a bit more difficult.  I believe third parties like Payfone will play a leading roll here. Payfone is jointly owned by top 6 US Banks, Amex, Verizon, RRE and a few other investors. They are tying together identity information of carriers, banks and platforms to score transactions and enrollment.

Customer Engagement

Google has many, many efforts here:

Retailers and Banks are loathe to give Google data, or let them assist directly in consumer engagement. However as long as Consumers choose Google’s services first, Google is in the driver’s seat. Companies that share data more effectively with them will reap greater benefits.

Wrap up

EVERYONE works with Google… it is where consumers are. Consumer behavior on mobile is changing much faster than anyone has anticipated. No one company can ever hope to compete with Google, they are moving fast to reshape the mobile economy.. where consumers spend 3 hr/day.


Android is a much easier platform to make investment. It’s a more predictable standards based environment compared to Apple (ex Sapphire glass or that darn lightening connector), with a strong partnership track record. Google’s democratic nature allows for experimentation. The path toward rewiring commerce is much easier in a Google world.

Having Google at the core of data is not without risks. Companies must work with many parties after all. How do you track the interaction between all of your partners today? Who has your consumer data? What will you share with whom? How can you accelerate trials and tests?

How do you combine your assets to create value in this new future? Without loosing control. This is the problem I am focused on.



Authentication – In “Value” Nets

March 3, 2014

Today’s blog brings together: the Role of Authentication in Value Orchestration, Apple’s Role in Commerce, Constructs for Compensating Authentication Agents, and Ability of Payment Networks to Adapt. The ability of other parties to assume risk in payment is the key shortcoming of all of our existing payment systems (see last week’s Blog). The recent activities around tokens can best be explained through this Risk Lens.

My use case for today: Assume Apple has the best biometrics system on the planet, and Consumers trust Apple with all their credentials. How can non-Apple Service Providers use Apple’s Authentication service (pay them)? As I outlined in Who do you Trust (Sept 2013)

The “KEY” [prerequisite] in value orchestration is owning the Consumer relationship. Therefore Identifying and Authenticating the Consumer is the first, primary, service that must be owned by a platform.  What was a separate “Trusted Services Manager” in the NFC world has been co-opted by platforms which will take a proprietary route.

This goes hand in hand with my other favorite payment quote from Ross Anderson with respect to payments:

If you solve for Authentication.. Everything else is just accounting

The Role of Payments in Commerce

As I’ve stated before payment is just the last (easiest) phase of a long commerce process that involves design, manufacturing, marketing, advertising, retail, payment, …etc. (see Payment enabled CRM). Payment is the key PROCESS by which these parties measure the effectiveness of their activities (think attribution). To measure effectiveness (and value) participants tie their activity to Consumer and: items, activities, processes, and behaviors. Answering questions like “did the consumer see our ad on facebook?”, “did our campaign influence the consumer’s buying behavior”?

Before we can assess the value of Apple’s Authentication we need to identify the processes and participants that can use the service. My bias is that the greater value to be unlocked is around the attribution than payment (as a side note Apple has constructed a new platform to manage an Advertising Identifier around this “identity arbitrage”). My personal bets are around the hypothesis (outlined in Apple and Commerce): that Apple’s biggest asset is their ability to change consumer behavior, and are working to make the iPhone the centerpiece of physical commerce (not payment). However, since I have no interest in writing a novel on the subject, I’ll give my highly condensed views on authentication in today’s payment instruments.

Value of Authentication in Payments

What is value of authentication in payments? To whom does the value accrue? We should not assume payment methods will change in anything shorter than a 20 yr horizon (analysis of value in existing payment networks). The value flow in a 4 party payment network is fairly simple: Merchant pays with the Issuer receiving 80% of the revenue. Any payment for Authentication must therefore come as “cost” to the issuing bank. There are 5 models for extracting authentication fees from Banks:

  • Bank chooses to pay (or exchange something of value … like data)
  • Network forces payment
  • Authentication provider forces payment
  • Consumers force payment, or Choose to pay themselves
  • Regulators force paymentGAO payment flow

Optimally a service cost would be based upon value (if the value declines … the cost should decline). Of course nothing in payments work this logically. Issuers like to have all the control, so that they can retain all the margin. In fact, Top Issuers would be fine keeping mag stripe with no authentication (see Perfect Auth… a Nightmare to Banks). Perfect authentication would eliminate all risks not credit related (ex ability to pay). It would therefore be very hard for Banks to justify any payment fees (interchange) beyond the cost of operation. Banks make their money on the ability to manage risk (not eliminating it). Mobile Authentication (biometrics) provides a mechanism to reduce risk outside of the bank’s services.

Startups.. this is the challenge in selling banks improved risk management or identity solutions that are not in their control. It is also why Banks want their services manifested through applications they control (not others). However, Banks must live in a world where their payment product does live outside of their environment (not that they like it, but Amazon does have a little potential to sell :-)).

A recent example of external network driven services: Verified by Visa (VBV) and Mastercard Secure Code (MSC). VBV/MSC rolled out in 2003 (Europe) and shifted eCommerce CNP risk to Banks. It was a complete and utter failure, not just from a tech view but also from a customer experience and business model. Merchants were incented to put the technology in place (10bps and fraud shift to Banks). VBV/MSC failed to catch the fraud… who was motivated to fix the flaws? Not the merchants.. they had given the fraud loss to the Banks and received a discount. It was rather the Banks, which were left with declines as their only tool (as I outlined in Perfect Authentication – A Nightmare for Banks). In other words, Banks had no way to pay the merchant to do a great job at managing risk in VBV/MSC, but only penalize a merchant for poor performance (through declines). This is why we don’t see VBV or MSC running in Amazon, Apple, Paypal, … etc.. Merchants fear declines much more than they do managing the fraud.

But how do a Banks pay external parties (ex Experian, EWS, …) for assisting in the risk management of payments? Usually a per transaction fee of $2-$5 in account opening, and then 10bps for transaction risk scoring (think check verification, although not all transactions need to be scored). The Networks themselves offer services for authentication and account management.

Authentication Fee Structures

Issuer Controlled

  • Interchange Rate Reduction ~15-30 bps based upon performance
  • Fraud Shift (for CNP + Auth in eCommerce)
  • Data Sharing (quid pro quo)

Network Controlled

  • New Category – Mobile Card Present with Authentication (30bps below current)
  • Network Enhancement Fee – Charged to Issuer (for Token and for Auth)

Platform Controlled

  • Authentication Fee (Nothing gets passed to Issuer unless they choose to use service)
  • Network support of new field(s) for Authentication information

My preference (for Authentication) would be for last item in the list, where Apple and Google assess an authentication fee to Banks which choose to leverage Authentication. This allows for performance based pricing. If the service is not providing benefit to the Banks, it is stopped. Issuers which invest in using the service will receive benefits that can be passed to consumer.

Oddly enough the danger in this approach is for Visa and Mastercard. As Issuers work with Google and Apple directly, it provides them an opportunity to end-run V/MA and define their own rules for CP/CNP, as well as Tokenize their existing portfolio and gain access to data.

Mobile Auth and Payments – Today

The scenario on biometrics and tokens is happening today… Apple’s new iPhone will have both biometrics, a secure enclave, and  patented Point of Sale Interaction. Host Card Emulation has evolved so quickly because Banks were told by Apple that they would have to pay for their cards operating within Apple’s scheme. As I outlined in Token Acceleration, the Banks responded by telling V/MA “we are not going to let our Cards operate under an Apple Patent… you guys killed our TCH project and said you would own this… so are you owning it or not?” Hence we have this Press Release.

The networks are committing a fair amount of brain power here. Clearly the benefits and control of a token led scheme will flow quickly to issuers unless there is a solid process to lock up the token standards and token translation. For example, assuming V/MA certify an HCE scheme that provides for “transparent” EMV compliant Paypass transaction.

This is why NO ONE has seen the token spec… and why it is not evolving as quickly as hoped. Not only must V/MA/Amex make the Spec functional, they must also work to control the token creation, authentication and routing rules. Arrggghhh…

Big Picture Thought

What we REALLY need is a payment network where risk and data can be owned by non-banks (selectively). This was my input to the Federal Reserve, and the driver behind last week’s post Risk: Carving it up in Payments.  Real time payments is not holding up innovation, the ability to take risk and manage it is (just as it is in our economy). While I believe Ross Anderson’ view that Authentication is the key to value, the dumb pipes are all owned by non-aligned Banks.

What if American Express created a new payment network that allowed for merchants to selectively own risk for clearing? In this model, Amex could operate as charge card, Bank, prepaid card, or link to another banked account. Merchants could assume risk depending on consumer history, payment type, purchase type, reputation, … Some merchants would choose to allow the consumer to decide. Others (like Grocery and WalMart) would encourage the consumer to choose the lowest cost instrument (selective settlement risk), or even change their relationship (banking, data sharing, … ).

If the value of authentication and the value of “payment” is not in settlement and risk but in the attribution, then we must have much more flexibility and consumer participation.What will glue together these new Value Nets?


Apple Services


Consumer Behavior: Discerning and Capturing Value

I can’t help but think of the Steve Jobs book, and all of the stories on his product focus.. from the curved lines around icons, to the curved back of the iPad. What do CEOs focus on today? How many of them really know why their customers use their product?

11 May 2013

Thought I would take a few moments before my Saturday Tennis match to discuss a top “success indicator” as a prospective investor: Consumer Behavior. I probably entertain 5-10 calls per week on new payment ideas.. my worst experiences are from individuals that start “I have a patent around…”… my eyes close I take a breadth, try to appreciate their personal energy in putting themselves out there, and then go on to encourage them to find a customer and ring me again.flock of migrating canada geese birds

For the calls that go through the next stage, I like to start with an understanding of the customer experience.  Why? Well establishing a great experience can build adoption like wild fire… but most new founders make very poor assumptions on how consumers will change behavior.  For example, consumers taking mobile phones out of their pocket, launching an app, connecting to wi-fi, and walking around a store looking for deals (every time they shop). When it comes to making assumptions on consumer behavior, Big companies suffer from the same problem. Where is the experience in bringing big new consumer offerings to market?

A few of my Fortune 50 examples hail from online banking (I was fortunate to have teams responsible for online at both Citi and Wachovia).  One of my biggest learnings by far was focus on customer at Wachovia… what do they do? What do they like? What don’t they like?.. what are the primary behaviors? By customer segment? Why do they bank with us? What do we do better?  Its just amazing what you can learn from your customers!

In the online banking space, my teams always faced a wall on the limited time consumers spend on banking sites. In retail banking (where you move money and pay bills) consumers log on an average of 4 times a week. They typically spend about 3-4 minutes as they.. check a balance, pay a bill.  Customers with self directed brokerage accounts have much higher interaction (perhaps 4-8 min), and Credit Card only customers have much lower interaction (Less than once per month, with active users of around 40-50%, compared with 80%+ for retail). One thing remained constant across all banking segments.. customers DO NOT explore the site… or expand beyond the task which they want to accomplish. 90%+ of all consumer interaction proceeds along 3-5 core behaviors. Customers come to online banking with an objective.. NOT TO SHOP.

This is one reason I’m very suspect of card linked offers. Consumers don’t go to their bank for “deals”, to check reviews, … to poke around what they could possibly get. Of course that could change..  if consumers were able to receive some sort of substantial value.. something they could get no where else.. .  But the effort to CHANGE BEHAVIOR is SUBSTANTIAL. It is much more than delivering a fantastic consumer experience, and delivering differential value, AND doing this consistently, it involves MUCH MORE (ex. existing behaviors, loyalty, Social factors) . In the CLO example, the consumer behavior change entails BOTH an online behavior (navigating offers), and a physical behavior (selling offers to merchants, assessing effectiveness vs. alternative, targeting, redemption, loyalty). Consumer PROFITABILITY for the merchant is also VERY DEPENDENT on consumer demographic. (See my CLO Blog).

Social factors are the primary drivers of commerce related behavior change (IMHO). What do your friends say? Community? This is the core of what makes Amazon and eBay great. The importance of Social factors shouldn’t be much of a shock, as we see this in how bees swarm, how ants find food, how birds fly.. all patterns that have a significant social component. This is why I remain very high on Facebook’s valuation.. as they have much room to leverage social networks for BEHAVIOR CHANGE.

Speaking of change, if you were going to influence someone: A) would you want them to come to you? Or B) would you go to where they already are? This is the key to evaluating any new concept…. Business plans that reach customers within their current patterns of behavior have a much lower risk. Where do you spend “open” time today? time that could be used more effectively? Airport? Google? In the Car?

This is why I love Square.. they aren’t telling the customers to carry something new, or to go somewhere they haven’t shopped before.. they work to make established behaviors stronger.. with a better customer experience.

Another example in the payments world is Payfone… consumers already use their connected devices to pay for things.. why do I have to type in all of my address, card information, …etc into a little mobile screen.. why can’t the carrier just send it over and fill it out for me.. they know my phone.. they know my information.

On the negative side I would put NFC. Consumers must buy a new phone, get their banks to provision a card, depend on a new merchant terminal type to wave their phone… Oh.. and the BIG ELEPHANT.. there are no NFC enabled debit cards.. which happens to be the primary way consumers pay for goods in the US. Also the only banks within the ISIS wallet are the ones that paid $1M to have their cards in the wallet. In the end NFC is slower, more expensive, harder to use, and has fewer options.. why is this a good thing for the consumer? Like a toll bridge with a 5 hour wait.

The best quote on the NFC topic was from a Top 5 global retailer “Tom NFC is like a toll bridge, but the telecos don’t want $2 to cross their bridge, they want 3% of what is in my truck.. and the entire shipping manifest… I think I’ll just find another way to cross…”

I can’t help but think of the Steve Jobs book, and all of the stories on his product focus.. from the curved lines around icons, to the curved back of the iPad. What do CEOs focus on today? How many of them really know why their customers use their product? At Wachovia, our CEO Ken Thompson called over to our team to tell us he had problems logging in.. It turns out he didn’t know the difference between his User ID and his Password.. as he transposed them.. yes this should have been an indicator, this same  brilliant man who bought Golden West with no due diligence (subsequently forcing liquidation to WFC).

For entrepreneurs, there are 100s of opportunities to build value where the consumer already is. Much of this revolves around helping existing entities build better relationships (like Square, Fishbowl, Payfone, Payments Enabled CRM, …). Along these lines there has been a sea change in the Valley over the last 18 months.. B2B is in, while NEW consumer brands and app companies are facing a much more challenging funding environment.

Even in this space, companies with stellar funding and boards can make terrible business decisions. My top example would be ShopKick.. why on earth would any retailer want to support little speakers in a store to help consumer’s earn kickbucks.. ? Am I really going to keep my phone on, and load an app when I walk in to Target .. looking for “deals”?  Why would Target or BestBuy want to let consumers earn value outside of their own brands? Both of these retailers would probably say.. “we were just playing around to learn some lessons”.. which makes perfect sense.. unless you were a ShopKick investor.

There is enormous Value in existing patterns.

A WalMart exec provided my top retail insight for the year. “Tom it doesn’t matter what ad our consumer sees, or where they see it.. when they decide to buy the product.. they will come to us.. “.

Walmart’s Everyday Low Prices (ELP), has helped them establish tremendous loyalty with their consumer base. They have been able to expand upon this trend and offer other services, from telecom (straightTalk), to Financial Services (Bluebird, moneygram, greendot, check cashing, …).

Before you run out with a business plan to help WalMart, remember they are the rocket scientists of retail.. and their procurement group are all from the Manhattan project. As they all excel in ensuring the value which is captured remains in WalMart. They have established a behavior pattern where consumers TRUST them for every retail interaction.

Thus not every pattern is valuable, or can be influenced easily. One of the things my online and payments team did at Wachovia was PFM. In fact we were the largest PFM bank in the world at one time (as we gave out the software for free to certain consumer segments). The consumers loved the software.. they were addicted to it.. problem was that it did nothing for me (Wachovia).. I wanted people to come online. It also turns out that consumers that use quicken are VERY literate financially. In fact, they were one of our least profitable consumer segments (with exception of wealth and self directed brokerage).

Their loyalty was to Quicken, over and above my bank… I needed that to change. In order to get them online I stopped the OFX connection service and told consumers that download was available only through the website.. online was my “virtual branch” and a a very important interaction.. I didn’t want consumers to think their bank was like a water utility..  we actually had a store (where we wanted to see them).. and thus wanted to reinforce an ONLINE relationship. Consumers who had historically used PFM used online banking very infrequently.. but when we forced the behavior change…  they realized that we offered much of the “PFM lite” capability… and were successful in converting most.. We did loose some.. (although we did not  touch wealth or small business customers).. others that were furious, but they were not profitable to begin with. Therefore it was a necessary change, we had to deliver value through our brand, not Quicken (or the now defunct MS Money), we had to disintermediate them.

I had a chat with the head of mobile at one of the banking teams… building a great new mobile offers service. He spoke about all of the alerts, the UI, the content..  I  said you are competing with: Facbook, Google, Groupon, Cardlytics, Shopkick, Foursquare, Visa, MA, ISIS, … and every other bank. All have alerts.. all have the same content. When I’m walking down the street am I going to have 8 different apps that all alert me to the latest deal? Is that really your vision? He said “no… honestly of course not.. but hey I’m only compensated to get this project done.. “ That certainly gives perspective on how Fortune 50s attack the problem.  In fact they are not solving any problem, but rather take a view on CAPABILITY (“we can do this”) vs. Strategy.. imitating just one facet of a successful business plan.

I could go on and on in stories.. but let me wrap this up with some of my Rules of thumb

  1. Consumer change not possible without a 20-30% change in the value proposition.
  2. Delivering consumer “Value” for free is much easier than making money at it (ie Twitter). Consumers don’t like to pay for anything. So how do you monetize the service? Can you really execute an advertising model?
  3. Who will deliver the “value”? How is value created? How will it be sustained? What can one of the 800lb gorillas do to crush you? How will you respond?
  4. What are your data dependencies? Who owns your data? Companies which add value on data they do not own resemble service provider revenue.. companies that own their data can exponential rev multiples.
  5. Loyal customers are by far the most profitable. Customer acquisition is just the first, easiest phase.. loyalty means delivering value everyday.  Is there a new value “chain” or does current success mean just reaching a new audience with current value proposition. How is loyalty established (although not every business is dependent on loyalty… ie gas station).
  6. Customers are not “Owned” by a bank, a business, or a service. Every entity claims a customer is “uniquely” theirs. The next phase of innovation will see greater collaboration between non-competitors around a common customer (Coke and McDonalds, Google and Everybody, …)
  7. Time to Market. Multiply number of parties that must do something new by 2 yrs to get total time to execute (Consumer, retailer, teleco, bank, payment network, …). This is the Apple advantage… NFC has 12 parties.. so that means 24 yrs.
  8. Consumer Facing. It takes $10M in marketing to acquire every 1M during early stage. Exception is around socially led change, or existing services that expand.
  9. Payments and Other Networked behavior involve much longer “Trust” behavior change on a 20 yr cycle. The early adopter “techie” demographic is under 10% of consumer base and NOT an accurate representation of all consumers
  10. Dependency on demographic alignment with business. Different consumers matter to different businesses. WalMart has very broad offering, Neiman Marcus a much narrower one.. The processes by which consumers are reached (advertising), select goods, develop loyalty, and purchase is complex. Few entities can deliver value to all consumers or to all retailers. Thus what is their focus, and how can it mature?
  11. Experience in rolling out direct to consumer offerings. Is the business looking at their customers? What else do they do? What other problems do their customers have?

Nokia, Apple, Android, Value Creation and Distributed Innovation

My firm belief is that we will start a mobile “boom” that will dwarf what we have seen with the WWW. The “Mobile TAM” in marketing alone.will be over $750B.

10 April

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

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

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

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

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

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

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

Open/Distributed Innovation

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

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

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

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

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

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

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

Stage 4 – Shift from Integrated Platform to Value Orchestration

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

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

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

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

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

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

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

4) Key Alliances and stakeholders

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

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

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

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

Examples of Cluster ochestration:

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

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


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

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

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

Sorry for size

Comments appreciated.

Customer Centered Design … Why is it SO Hard?

I have now learned that I don’t know what the customer wants or needs.. and the direct customer interaction is VERY beneficial to all involved.. from product to engineering to the call center. Communicating to the customer (if done correctly) is a great thing.. great customers love you and they want to know what you are working on.. find ways to share it with them. If customers perceive they are getting value they want to HELP you. It is imperative to build facilities to get this feedback.

7 Nov 2011

I woke up this AM thinking about consumer value. Why is it that so few existing companies can deliver disruptive consumer value propositions? Execute innovation? It seems as if big companies are more interested in imitating what their competitors are doing … as opposed to focusing on customer (to deliver value). Steve Jobs was one of the few big business CEOs that focused on Customer. He knew that creating a fantastic customer experience was essential in anything to be “sold” to consumers, whether that was Apple or Pixar . Everything flowed from a consumer DESIGN and experience which then evolved to product and subsequently to engineering. Apple was fanatical about customer experience and customer centered design, obviously quality (hardware and software) and connected services were also essential in driving the experience to establish behavior.  How many products in the market start with customer centered design? How many of your product heads know their customers and how they differ by segment?  My time at Gartner and Oracle led me to a few hypotheses on software products:

  • Every Software product usually starts with a customer in mind… but customer focus typically fades fast as other objectives (financial, competitive, alliances, big “special” customers, timeline: execution on “something”…) move the product off of the initial customer centered goal.
  • Delivering any consumer value proposition requires either a killer value proposition or a killer distribution channel.  Consumer adoption is “unpredictable” at best…  be highly skeptical of any initial success (acquiring early adopters of a product) never resembles the broader launch when the product goes mainstream.
  • Small companies (leading delivery of a visionary consumer service) require alliance partners… Alliance partners require financial incentives that quickly erode the original value proposition. “when you dance with an 800lb Gorilla, you can expect to have your toes stepped on”. Give equity and it biases your board (focus on their problems/customers), give cash and it kills the consumer or the distribution channel. Equity is better.. but structure in a way you can take them out.
  • New Software products within large companies (ie MSFT, SAP, Oracle) are either poorly integrated into the core, or not integrated at all.  Product teams can spend over 50% of resources focusing only on internal integration… which further distracts from original  customer centered design. There is usually a case for 2 product teams here.. one focused externally on customer and market, they other focused internally on integration requirements.
  • Customer testing and trial is a 9 month+ process… no exceptions. Few companies go out of their way to solicit negative customer feedback on a new product. They are much more concerned about “secrecy”…  Companies may have justification for short-circuiting (Example: “what are we supposed to do with the engineering team while we wait for feedback”) usually come back to haunt as products in market are much more difficult to change AND effect consumer perception/adoption.  Cloud based services are no exception , “lets throw our product out there and see what happens, we will fix bugs later” is not a great business plan. This model makes your early adopters unpaid quality assurance participants..
  • Few companies can survive by tackling a niche in the consumer market. There are only 3 markets (US, EU, China) where a 10% market share equates to a sustainable business
  • Large companies may not be able to “win” in delivering a new value proposition, but they can muck it up for everyone else. Their game plan is one of “control” over value. They leverage their existing network, infrastructure, products, communication and market power to influence potential customers.
  • Consumer visionaries and innovators play a distant second to executives driving financial performance. There are exceptions. For example, Google is also a fantastic innovator, a result of having the best minds working round the clock with pressure to do something great.. not to drive a revenue target.

Story.. my lessons

My lessons learned on customer centered design are many… After Oracle I went back to my old team at Wachovia (which had just bought First Union) our team had launched the world’s first major online bank in 1995 (Cyberbanking).. I was fortunate to return to oversee the complete remaking of our online and payment services infrastructure… a $200M project (2002). As an engineer.. I have many faults..  among them thinking that I know what the customer wants without ever talking to them… We had 2 excellent execs at Wachovia that completely changed the way I thought about customer centered design.  We brought customers into the product design process at every stage.. hand drawn screen mock ups.. asking them obvious questions… Why do you do this? what are you looking for? When do you typically do this? What does this mean to you? Jason Ward’s amazing team took this customer feedback and analyzed it to prioritize product design changes.  When I started at Wachovia…. we had no facilities or process for including customer feedback, it was the call center’s problem to deal with. After development was complete, we did extended “dog fooding” with employees and customers.. then brought that feedback into refine final release. We also communicated with ALL customers.. why are we upgrading? what will be changing? We explained what things will look like. 3 months before it happened (believe it or not customers don’t like surprises in their bank).

What happened next was something that still amazes me.. During upgrade customer call volume went DOWN.. we transitioned customers from one system to another… completely changed screen flows … and they did not call to ask questions, they did not call to complain..  We had budgeted for extra call center staff.. and we didn’t have anything for them to do..  What was more amazing is that our customer satisfaction went up… DURING the transition to the new system. This is unheard of..

I have now learned that I don’t know what the customer wants or needs.. and the direct customer interaction is VERY beneficial to all involved.. from product to engineering to the call center. Communicating to the customer (if done correctly) is a great thing.. great customers love you and they want to know what you are working on.. find ways to share it with them. If customers perceive they are getting value they want to HELP you. It is imperative to build facilities to get this feedback.  In Wachovia there was only 2 regular standing meetings that the CEO would attend… financial and customer listening.  Although Wachovia failed on many other grounds.. it taught me the importance of keeping eyes on the customer and ensuring I received the RAW customer data. My priorities became my teams priorities.

Sorry to ramble… I have quite a few peers and former employees read this. Wells Fargo just completed the last migration off of our $200M Wachovia platform. The migration was very well done.. but quite frankly I miss what we had. WFC’s online banking is too clumsy.. too much information.. The difference between using an iPhone and flying the space shuttle (photo below). … although I miss that too.