Google Wallet Makes Big Change of Mobile Payments Strategy

Google has changed iits digital wallet strategy in a significant way, one might argue. In the past, Google Wallet has stayed out of the “interchange fees” part of the revenue stream, in favor of an exclusive reliance on loyalty, advertising, offers and other marketing and advertising functions.

But with the decision to support virtually all the major branded cards inside Google Wallet, a shift of revenue strategy could occur. A new cloud storage strategy does a couple of things. First, all major card brands can be accomodated, even if the resident application on a Google Wallet device is the prepaid MasterCard account.

The new approach is closer to that of PayPal than was the case for Google Wallet’s initial positioning, says Zilvinas Bareisis, Celent consultant. And the change makes Google Wallet a venture that makes money from transactions, something the older Google Wallet did not attempt to do.

The cloud-based credentials still require use of the MasterCard PayPass terminals and software loaded on each Google Wallet device. But since the MasterCard prepaid account is linked (in the cloud) to MasterCard, Visa, Amex and Discover accounts, Google Wallet users can use the wallet in much the same way as PayPal.

That would be a fundamental shift of strategy. Before, Google Wallet was not a transaction processor in the same way as PayPal functions. Now, Google Wallet will, in effect, become a transaction processor, in an indirect way.

More accurately, it has become a merchant of record. Google sits in the middle of its Wallet transactions, rather than just passing through plastic credentials to an NFC enabled smartphone.

The new approach also bypasses the need to cooperate with mobile service providers, and allows Google Wallet to be provided “over the top,” without using the mobile service provider secure elements. Card issuers might like that angle, since it means they are relieved of the obligation of paying fees to any mobile service providers who want to get a slice of transaction processing revenues.

Google Wallet becomes as a “merchant of record” for transactions. True, they won’t have to incur the extra costs of provisioning their card credentials on to secure element, but that would also rule them out from participating in other NFC ventures, such as Isis.

Now, from the merchant point of view, they are accepting a prepaid MasterCard, while it might an Amex card that actually funds the transaction. PayPal deals with it by having direct acquiring relationships with its merchants and offering them a discount rate which represents an expected blend of funding transactions, says Bareisis.

Does it also mean that Google Wallet will have to establish relationships with the acquirers to re-coup from merchants any potential differences in transaction costs? Or will it have to charge the end user for “loading” their wallet, something that other prepaid card providers do for card-based re-load transactions?

In any emerging business, it is not unusual for start-ups, even those as big as Google Wallet, to change business models in dramatic ways. Isis, the mobile service provider service, initially envisioned being a “merchant of record.” Then Isis decided to take the former Google approach, and eschew any role in transaction fees.

Google now has taken the reverse path, essentially adopting the former Isis approach. In other words, both Isis and Google Wallet now have reversed their initial positions on revenue models in the wallet space.

Verizon Will Have to Abandon Cable Marketing Deals to Get Cable Spectrum

Verizon may have to abandon its agency deals with several U.S. cable operators as a condition of gaining Department of Justice approval of $3.9 billion worth of spectrum sales by the cable operators, Reuters reports.


Those agency agreements, which allow cable operators Comcast, Time Warner Cable, Cox Communications and Bright House Networks to sell Verizon services, while Verizon can sell cable operator services, apparently are viewed as anti-competitive by DoJ lawyers, and are not, strictly speaking, a part of the deal whereby Verizon would buy mobile spectrum from the cable operators.


Sources tell Reuters that DoJ will require a halt to the agency deals wherever Verizon has network assets, essentially. That apparently would satisfy DoJ officials that neither cable nor Verizon would use the marketing deals to essentially end facilities-based competition between Verizon and cable firms. 

Justice Department officials think the marketing deal would be  amounting to an agreement "not to compete" with each other. Barring of the agency deals would require some rethinking, by the cable operators, of their wireless strategy.


Where in the past the cable operators had worked with Sprint, they had recently been hoping to work with Verizon Wireless, as part of the agency deals, to add a wireless product to their triple-play offers. If the DoJ blocks those deals, cable will have to find some other way to create a wireless strategy.

DirecTV U.S. Subscriber Base Shrinks in Second Quarter 2012

DirecTV suffered a U.S. subscriber decline for what seems to be the first time many of us can recall, raising questions about whether that result is entirely a deliberate DirecTV policy related to bad debt, or perhaps an indication that the satellite TV business has reached a peak, in terms of market share.


Net subscribers declined in the quarter "principally due to lower gross subscriber additions, partially offset by a reduction in the average monthly churn rate," DirecTV says.


But DirecTV also says the "gross additions declined mainly due to a greater focus on higher quality subscribers and stricter credit policies, as well as lower gross additions from the telco sales channel."


In other words, some of the slower net additions were the result of DirecTV refusing to sell to some potential customers, while sales activity by telco partners is waning. 


The lower churn rate was mainly driven by a greater percentage of subscribers on contracts, auto-bill pay and customers that buy advanced equipment, DirecTV reports. 


Average revenue per user increased 4.2 percent to $94.40, due mostly to price increases on programming packages, higher advanced service fees, pay-per-view revenues and penetration of premium channels, partially offset by increased promotional offers to new and existing customers, DirecTV said. 


DirecTV's 19.91 million U.S. subscribers represented an increase of two percent, year over year, though. 

Smart Phone Owners Report More Problems with Call Quality, Spam, Internet Quality

As useful and valuable as consumers find smart phones, based on their buying of the devices and services, smart phones do seem to produce higher rates of call quality issues, unwanted text messages and, obviously, Internet access experience, a study by the Pew Research Center’s Internet & American Life Project suggests. 


The findings point out an apparent contradiction: though people find relatively high instances of product failure when using either feature phones or smart phones, the value so vastly outweighs the advantages and even the defects do not deter high rates of product acceptance. 


Some of us would note that, for decades, cable TV providers faced the same issues, and in some ways still do. Consumers frequently rank their "satisfaction" relatively low, compared to other products. But that has not historically lead to product abandonment. 


In recent years there has been significant loss of market share to other providers, but even the other providers receive substantially the same complaints as do cable TV providers. 


Some would argue that subscription products generally are less favored than other goods. Whether that is because such products often are intangible, or disliked for some other reason, is hard to determine. 


But it is somewhat striking that so many consumers of mobile service experience the reported problems. Some 88 percent of all American adults have mobile phones and 72 percent of respondents experience dropped calls at least occasionally. 


Some 32 percent of mobile device owners say they encounter this problem at least a few times a week or more frequently than that. About 68 percent of cell owners receive unwanted sales or marketing calls at one time or another. 


And 25 percent of mobile phone owners encounter this problem at least a few times a week or more frequently, the study suggests. 


Of users with mobile broadband service, 77 percent of respondents said they experience slow download speeds that prevent things from loading as quickly as they would like. Of those mobile Internet users, 46 percent report slow download speeds weekly or more frequently.




Smart phone owners reported higher incidence levels of these problems, compared with feature phone owners. 

IP Transit Price Disruption Heating Up?

Prices for wholesale IP transit service normally decline, on a price-per-bit basis, every year. So the mere fact of price-per-bit decreases should not normally constitute a reason for concern. 


The only thing that does raise concern is a rate of price decline that is higher than expected. So it is that TeleGeography says IP transit price declines in most locations accelerated over the last year.

The median monthly lease price for a full GigE port in London dropped 57 percent between the second quarter of  2011 and the second quarter of 2012 to $3.13 per Mbps. The issue is that prices had dropped at a 31 percent rate of decline between 2007 and 2012. 


In New York, the comparable price dropped 50 percent to $3.50 per Mbps over the past year, and 26 percent compounded annually over the five-year period. 


Just how significant that is cannot yet be determined. A dip during or immediately after the 2008 Great Recession would not have been surprising. A faster drop in prices, given the current recession, might not be unusual, either. And there seems no shortage of new competition in either London or New York markets. 


On the other hand, the trend of IP transit pricing on the highly-competitive routes to London and New York do not seem out of line with long-term trends, either. 


    Median GigE IP Transit Prices in Major Cities, Q2 2007-Q2 2012

Source: TeleGeography

Time Warner Cable Now Earns 43% of Revenue From "New" Sources

In its second quarter 2012 earnings report, Time Warner Cable earned about 57 percent of its revenue from legacy sources (video entertainment subscriptions and advertising). The problem, one might argue, is that the 42 percent of revenue earned from "new" sources includes two sources, namely high-speed access and consumer voice, that have, in turn, become "legacy" revenue sources.

The latest "new" source of revenue is voice and data services for business customers. At some point, that source also will become a "legacy" source.

That points up a larger strategic challenge, namely how Time Warner Cable can continue to grow, as all its "new" revenue sources become "legacy" sources that cannot drive significant growth.

Excluding the impact from acquisitions, residential services revenue growth was primarily driven by an increase in high-speed data revenues, partially offset by a decline in video revenues, Time Warner Cable says.

Time Warner Cable lost 169,000 video subscribers during the quarter.

The growth in residential high-speed data revenues was the result of growth in high-speed data subscribers and an increase in average revenues per subscriber (due to both price increases and a greater percentage of subscribers purchasing higher-priced tiers of service), Time Warner Cable says.

Residential video revenues decreased driven by declines in video subscribers and revenues from premium channels and transactional video-on-demand, partially offset by price increases, a greater percentage of subscribers purchasing higher-priced tiers of service and increased revenues from equipment rental charges, Time Warner Cable also reported.

Residential voice revenues remained essentially flat as growth in voice subscribers was offset by a decrease in average revenues per subscriber.

Consider Comcast, the largest U.S. cable TV company. Comcast now relies on its core legacy service, video entertainment revenues, for about 33 percent of total revenue. How Time Warner Cable could get to similar levels now becomes the issue.

Here's Why AT&T is Intentionally Slowing iPhone Sales

Compared to other key competitors, AT&T sells more iPhones. 


Since iPhones impose the greatest subsidy burden, AT&T gains if it sells a mix of devices carrying lighter subsidy costs. 


The cost of such handset subsidies has become a bigger issue globally, as every service provider struggles with the operating cost issues such subsidies represent.


It is no secret that mobile service providers globally want to reduce the amount of money they spend to subsidize smart phones for their customers.

The problem is that the subsidies raise operating costs, and thus affect cash flow.

Of course, it can be argued that such subsidies also provide value, in part by reducing customer churn, as consumers often must sign contracts to qualify for the device subsidies.

Some would argue that although there is a positive churn reduction effect, the amount of reduced churn  is only 27 percent of incremental subsidy cost for AT&T and 45 percent for Verizon.

This means AT&T is actually losing more than $2 billion by providing iPhone subsidies, for example, while Verizon is losing nearly $1 billion. Verizon's "losses" are lower because it has sold fewer iPhones than AT&T. Over time, that gap should close.

Mobile service providers aren’t happy about the cost of device subsidies that cause a drag on earnings. For AT&T, the financial impact of iPhone subsidies is clear. AT&T profit margins had grown for five straight years beginning in 2005, but reversed in 2010, apparently related directly to iPhone 4 demand and subsidies, BTIG argues.

BTIG argues the iPhone subsidies have reduced AT&T margins by at least 10 percent in 2011, for example.

But the trick is how to wean customers off the subsidies without seriously slowing the smart phone adoption rate, since most smart phone customers, given a choice, buy subsidized devices, with a contract, rather than paying full retail price and buying service without a contract.

Up to this point, the decision hasn’t been terribly difficult. A Motorola Mobility Holdings Droid 4 costs $549.99 without a contract and a 16-gigabyte Apple iPhone 4S, which runs only on 3G networks, is $649.99. Verizon Wireless offers both devices for $199.99 with a two-year data plan commitment.

It therefore comes as no surprise that nearly all customers choose to buy a subsidized device.

Up to this point, for example, Verizon has not charged a fee to its subscribers when customers decide to upgrade to a new device. But Verizon in April 2012 announced it would charge a $30 fee when that occurs. For Verizon Wireless, that could add up to $1 billion to Verizon’s annual earnings, and also boost profit margins, BTIG argues.

But that’s not all. Verizon Wireless now will provide incentives for users to pay full retail for their devices, using the bait of “unlimited” mobile data plans. That is likely to cause buyer sticker shock, though.

The new Verizon Wireless plan to end "unlimited" service and move users to capped plans primarily is aimed at matching end user data consumption to usage. But Verizon Wireless also appears to be using the opportunityto wean customers off device subsidies.

Verizon says "when we introduce our new shared data plans, unlimited data will no longer be available to customers when purchasing handsets at discounted pricing," unless of course the customer wants to pay full price for a device.

One might doubt the “full retail phone price, unlimited usage” plan will be chosen by many customers, though.

On the other hand, it is an interesting way of enticing some users to pay full retail for their devices. One wonders what Verizon might think of next, aside from simply raising the prices of devices sold with contracts. 

In the meantime, suppliers such as Virgin Mobile and Cricket Communications should provide an early real-world test of demand, as both those mobile service providers will sell iPhones at full retail.

Smart phones have been very helpful for mobile service providers, boosting average revenue per user by driving mobile broadband subscriptions. But the subsidies generally used to spur sales are bcoming a major drag on earnings, and change is coming. Basically, service providers will have to risk lower sales growth, and less mobile broadband revenue growth, to limit handset subsidies. It might be a Faustian bargain.

In fact, what seems to have happened is that user behavior has changed, with users upgrading those “expensive” smart phones faster than they had generally been upgrading their feature phones, analysts at BTIG say.

As a result, U.S. mobile service providers plan to take steps to reduce handset upgrades as a way of raising operating margins. That is likely to affect sales of Apple iPhones, generally considered the most-expensive device to support.

AT&T, Sprint, Deutsche Telekom, Vodafone, America Movil and Telefonica are among firms planning to take steps that will slow iPhone sales in the coming year.

In the United States, BTIG expects iPhone sales to decline four million sequentially to nine million with the largest impact coming from AT&T, Apple’s largest customer.

In fact, AT&T says it has built its business model for 2012 around the idea that it will sell no more smart phones, overall, than it did in 2011, about 25 million units.

BTIG analysis suggests something quite significant. Despite the importance of smart phone accounts for growth of key broadband revenue, AT&T has decided to essentially cap smart phone sales to preserve its profit margins.

The impact should be clear: fewer iPhones sold by AT&T, and possibly fewer iPhones sold by other mobile services providers. That could lead to market share gains by other smart phone makes and models, or could spur Apple to produce lower-cost iPhones.

What the carriers hope for is the ability to sustain average revenue per user growth, and higher profit margins. 

Vodafone's Spanish division is bringing back cut-price smartphones for new customers for a limited time, the firm said on Monday, prompted by a mass client exodus in recent months after scrapping handset subsidies in the recession-hit country, Reuters reports.

The move illustrates the clear danger for any single service provider that attempts to break from established practices that consumers find helpful, such as selling hot new devices at subsidized prices, even if that means consumers need to sign a service contract.

Vodafone says the policy is temporary, and will end September 15, 2012.  

Vodafone and Telefonica, with almost 70 percent market share between them, have suffered huge subscriber losses since they decided to use Spain as a test case for a new business model that cuts subsidies for smartphones.

Vodafone has lost over 600,000 mobile clients since April, when it stopped slashing prices on smartphones, while Telefonica's Movistar lost 572,000 in April and May, according to data from Spain's telecoms regulator.

It remains to be seen whether Vodafone actually will reinstate the "no subsidies" policy after September 15. Given the crushing recession in Spain, Vodafone probably needs to do everything it can to stem the subscriber losses, and boost uptake of smart phone services.

Mobile service providers in Spain lost a quarter of a million clients in May 2012, the fourth consecutive month of subscriber losses, la Comisión del Mercado de las Telecomunicaciones says.

The industry also lost 380,000 customers in April 2012, according to the Spanish telecommunications commission.

Precisely why customers are deserting is the issue. Spain is in what might be called a deep recession, so it is possible customers are dropping their mobile subscriptions to save money.

And it remains true that prepaid service, which offers consumers more control over their spending, continues to gain customers, which might reinforce the notion that economic distress is causing what might be called an unusual negative move in mobile subscriptions.

But some might suspect that the industry's end of subsidies for handsets also has had some negative impact, primarily by shrinking the number of new accounts mobile service providers need to add every month to compensate for departing customers.

BlackBerry to Exit Hardware Business?

Thorsten Heins, chief executive of Research in Motion, says RIM cannot compete in hardware, and is willing to license the BlackBerry 10 operating system to other handset manufacturers.

“We don’t have the economy of scale to compete against the guys who crank out 60 handsets a year," says Heins. "To deliver BB10 we may need to look at licensing it to someone who can do this at a way better cost proposition than I can do it."

Vodafone Spain Brings Back Device Subsidies

Vodafone's Spanish division is bringing back cut-price smartphones for new customers for a limited time, the firm said on Monday, prompted by a mass client exodus in recent months after scrapping handset subsidies in the recession-hit country, Reuters reports. 


The move illustrates the clear danger for any single service provider that attempts to break from established practices that consumers find helpful, such as selling hot new devices at subsidized prices, even if that means consumers need to sign a service contract. 


Vodafone says the policy is temporary, and will end September 15, 2012.  


Vodafone and Telefonica, with almost 70 percent market share between them, have suffered huge subscriber losses since they decided to use Spain as a test case for a new business model that cuts subsidies for smartphones.


Vodafone has lost over 600,000 mobile clients since April, when it stopped slashing prices on smartphones, while Telefonica's Movistar lost 572,000 in April and May, according to data from Spain's telecoms regulator.


It remains to be seen whether Vodafone actually will reinstate the "no subsidies" policy after September 15. Given the crushing recession in Spain, Vodafone probably needs to do everything it can to stem the subscriber losses, and boost uptake of smart phone services.


Mobile service providers have clear motivation to stop subsidizing smart phone sales, as such practices harm operating results. But, as Vodafone has discovered, such practices also can lead to high customer churn or slow smart phone adoption.


Subsidies might just be a necessary evil, from a service provider perspective, where it comes to encouraging adoption of high-end smart phones, with their associated boosts in recurring revenue.  

Small Cells Provide More 3G than 4G Value

Small cells deployed by mobile operators in areas of high traffic actually will provide more value, in the near term, for 3G operations than for 4G operations, Strategy Analytics argues. Small cells also cost significantly less than 3G macro cells for the same coverage area but slightly more than new 4G Long Term Evolution macro cells, says Sue Rudd, Strategy Analytics director.

“This is largely due to the ‘consumer electronics-like' vulnerability of very large numbers of small cell sites that require installation and ongoing maintenance," Rudd says.

"Cost is not the only reason to choose small cells since they offer faster installation for rapid upgrades in throughput” says Phil Kendall,  Strategy Analytics  director. "Estimates vary, but small cells will probably increase throughput by over 200 percent in legacy 3G hot zones, or at the edge of macro cells where data throughput is poor.”

Throughput improvements could reduce the cost per megabit by 30 percent, he argues.

AT&T Puts Breaks on Apple iPhone Sales

Regional retail sales managers at AT&T have been instructing store managers to put the brakes on Apple’s iPhone, as company executives had said they would do in 2012, it appears. The issue is device subsidies. It costs AT&T more money to subsidize iPhones than other devices. And those subsidies put pressure on AT&T earnings.


As reported by Boy Genious Report, customers seeking smart phones at AT&T retail stores are being steered away from Apple’s iPhone and towards Android phones or Windows Phone devices such as the Nokia Lumia, BGR says. 


Even when customers come into stores specifically looking for the iPhone 4S or iPhone 4, staffers have been instructed to make an effort to show people Android and Windows Phone devices as well.


In addition, AT&T retail staff in at least some locations are no longer permitted to get iPhones as their company-owned devices, and must instead choose an Android smartphone or a Windows Phone.


One source told BGR that Apple’s iPhone used to make up as much as 80 percent of smart phone sales at stores in his area, but that figure has dropped dramatically to between 50 percent and 60 percent. 

"Payments," As Such Are Not What Consumers Value

“Consumers do not have much interest in payments," says James Le Brocq, managing director at O2 Money. "They want to do things in their everyday lives conveniently: travel to work, buy lunch, buy a gift."

New Cloud-Based Google Wallet App Released

Google has released a new, cloud-based version of the Google Wallet app that supports all credit and debit cards from Visa, MasterCard, American Express, and Discover. Now, users can choose to pa with any of those card brands when  shopping in-store or online with Google Wallet.

The new version also allows users to remotely disable their mobile wallet apps. If a Google wallet user loses a phone, they can use the ‘Devices’ section in the online wallet to disable all cards used with the wallet.

When a user disables their wallet on a device, Google Wallet will not authorize any transactions attempted with that device. If the Google Wallet online service can establish a connection to your device, it will remotely reset your mobile wallet, clearing it of card and transaction data.





The Google Wallet app now stores user payment cards on highly secure Google servers, instead of in the secure storage area on your phone. A wallet ID (virtual card number) is stored in the secure storage area of the phone, and this is used to facilitate transactions at the point of sale.

This new approach also speeds up the integration process for banks so they can add their cards to the Wallet app in just a few weeks. Banks that want to help their customers save cards to Google Wallet, including their custom card art, can apply here.

The new Google Wallet app is available now on Google Play.

Olympics Streaming Seems to Hit Netflix Streaming

ISP technology provider Procera Networks reports that Netflix streaming was down a quarter from normal levels in the U.S. Sunday, even though overall streaming video traffic was way up, according to Procera Networks.

Procera Networks notes that Netflix streaming was down 25 percent on July 29, 2012, for example.

Netflix CEO Reed Hastings had suggested this would happen. “This quarter the Olympics are likely to have a negative impact on Netflix viewing and sign-ups,” Reed Hastings has said, in setting third quarter 2012 guidance at one million to 1.8 million domestic net adds.

U.S. Becomes Biggest Global Market for Mobile Internet Advertising in 2012

Spending on mobile Internet advertising in the United States will top all other countries in the world for the first time in 2012, helping drive mobile ad spending worldwide to $6.43 billion in 2012, according to eMarketer.

Until this year, Japan was the world’s largest market for mobile advertising, with spending reaching $1.36 billion in 2011, up from $1.01 billion in 2010, eMarketer also says.

Spending on mobile internet ads in Japan will grow 27.2 percent to $1.74 billion in 2012, versus 35.4 percent growth in 2011, eMarketer reports.

Mobile internet advertising spending in the United States, by comparison, will grow 96.6 percent to $2.29 billion in 2012, up from $1.16 billion last year, according to eMarketer.

North America also will surpass Asia-Pacific in 2013 as the world’s largest regional market for.