Groupon Another "Netflix?"

Groupon is starting to remind me of Netflix, which has had to survive a few bouts of deep skepticism in the past about a business model that could not survive. Likewise, Groupon has been "left for dead" by many observers. Like Netflix, it defies skeptics. 

In its second quarter of 2013, Groupon "significantly exceeded our operating income expectations, and delivered our strongest quarter ever in North America, due in part to accelerated billings growth of 30 percent," said Eric Lefkofsky, CEO of Groupon.

In June 2013, nearly 50 percent of Groupon North American transactions were completed on mobile devices, compared with about 30 percent in June 2012, Groupon says. 

More than 50 million people have now downloaded Groupon mobile apps worldwide, with more than 7.5 million people downloading them in the second quarter alone.

We are in a New Phase of the Smart Phone Market

You know you are in a new phase of any market when older questions don't make as much sense. Remember the discussion and speculation several years ago about whether any other manufacturer could build a device to rival the iPhone?

Would that question still be salient today? No, some of us would say. Probably not, all of of us might say. 

That is the reality behind the numbers that show convergence of sales and profit between the Samsung Galaxy line of devices and the iPhone.

Canaccord Genuity is out with its quarterly look at the "value share" in the smartphone market. Samsung has dramatically narrowed the gap with Apple.

Vodafone Opts for Content, Value to Differentiate 4G

Whether there is a new “killer app” for Long Term Evolution remains an unknown possibility. Up to this point, it is fair to say, “faster access” has been the value proposition. Some with longer memories will recall that among the advantages of third generation networks was the creation of a platform for new services, though.

For the first half decade or so after widescale deployment, such new apps did not actually emerge. So the issue is whether, or when, such new apps might emerge for 4G.

Vodafone, it appears, wants to try a little harder to change the value proposition using content and retail pricing and packaging, rather than speed or better coverage, which might be said to be the more traditional value pitches for a mobile broadband or mobile data service.

“While the presumed emphasis on 4G has always been on coverage and network speeds, Vodafone has opted to focus on the content deals and tariff options behind its offer,” says Emeka Obiodu, Ovum principal telco strategy analyst.

There might be another way of looking at the LTE strategy as well. Most service providers, when it is possible to claim it, tout their better coverage or speed. That often comes with a “premium” positioning, as is characteristic of Verizon Wireless in the U.S. market.

To be sure, Vodafone would not concede that it does not have coverage advantages. But it does not seem to be “leading” its marketing with those advantages, and instead is emphasizing content and value.

Obiodu argues that Vodafone wants to avoid the mistakes of the initial 3G introduction, when it was too focused on building and marketing the best network, only to see other competitors emphasize the value proposition, the Ovum researcher says.

“So this time, Vodafone is focusing on getting the commercial proposition right,” he argues.

“We expect the deals with Spotify and Sky Sports to appeal to a lot of customers.”

The focus is on business model innovation. Doubling the data package, and content access are ways of changing the value proposition, convincing customers to spend an additional £5/month, instead of just selling a faster network.

That probably will be important over time, as virtually all the contestants are able to sell faster 5G service, eliminating the distinctiveness of “speed” and, if nothing else changes, drawing attention only to matters such as price.

Stickers Make LINE Money

Who'd have thought a business model could be built on "stickers!"

LINE Corporation’s revenue for the quarter was JPY 12.8 billion, up 348.9 percent over the same quarter of 2012 and 45.3 percent over the previous quarter. 

Revenue sources included in-game purchases (53 percent), sticker purchases (27 percent), official accounts, and sponsored stickers, LINE says. 

Telefónica Reportedly Will Shut Down Over the Top Voice App Tu Me

Telefónica reportedly will shut down Tu Me, its over the top free messaging app, on Sept. 8, 2013. Some had questioned the logic of competing against the likes of Skype and WhatsApp with a branded single-carrier app.

The shutdown of Tu Me might confirm the thinking that such an approach is difficult to impossible. T-Mobile’s Bobsled and Orange’s Libon remain active, so the matter is not completely resolved.

At least in part, the original thinking behind Tu Me was that availability of the app would allow users who were not Telefónica subscribers to communicate with Telefónica customers, eventually perhaps driving incremental calling revenue, as SkypeOut does.

At the time of its launch, some suggested Telefónica was a standout among service providers that “got it.” Such observations frequently have proven wrong.

Service provider executives are not dumb for refusing to embrace some business models that make sense for over the top app providers. As their experience with VoIP has shown amply enough, just because Skype or WhatsApp can build a business offering free voice or messaging, that does not mean a telco or cable company can do so.

As it turns out, Tu Me could not get traction, at least, not enough traction to create a huge user base that might have enabled a sustainable revenue model. As Tu Me might illustrate, service providers cannot always compete successfully against over the top apps with their own branded versions of such apps.

Do Apple iPhone Sales Mean Apple is the Same Company as it Was in PCs?

Apple, in its days as a supplier of personal computers, never had much market share, compared to machines of the Windows ecosystem. And while Apple still makes the argument that profit, not sales volume, is its top concern, Apple's recent smart phone sales are starting to remind some of us of Apple's past, when another ecosystem gobbled up the sales volume, installed base, and influence.

The Android ecosystem is approaching 80 percent market share. Apple's iOS still is significant, to be sure. But even Apple's profits seem to be dipping, as Samsung's profits climb almost to parity with Apple. 



Though it might have seemed far fetched not so long ago, Apple is facing a replay of its experience with PCs, where it lost leadership to Microsoft early on, and survived only a niche supplier. That isn't to say necessarily will repeat itself, but the numbers should provoke concern. 

Some would say Apple's iPhone business, as originally constructed, no longer works. The high-end is saturated, so Apple needs to introduce a low-cost iPhone, even if that risks further weakening of its average selling price and pressure on profit margins. 
 

 

Unlicensed Spectrum Can Dramatically Reduce ISP Breakeven Points

You'd undoubtedly be correct--or at least in very good company--if you predicted that mobile data access would be the primary way most people without Internet access will use it over the next 10 years. 

But some of us also would argue that other methods will play a significant role, including public-private partnerships, Wi-Fi hotspots, non-profit or fixed broadband access services as well. 

Some of us also would argue that the only way ubiquitous coverage for all potential users, including those with little ability to pay commercial rates, will hinge on creating lower cost alternatives ot mobile or fixed network service.

That is no slam on mobile or fixed ISPs. It simply is a recognition that the cost structures for telcos and mobile service providers might not allow for very low cost access, and reasonable usage buckets, for users with little disposal income. 

For that reason, some of us believe shared spectrum and unlicensed spectrum will be necessary parts of the overall Internet access ecosystem in many regions where consumers are underserved, or not served at all. 

By reducing government licensing and spectrum purchase requirements, at least some ISPs would be encouraged to create sustainable access services that would be absolutely unfeasible if those ISPs had to buy licensed spectrum or comply with the full set of regulations telcos and mobile service providers must obey.

Google Starbucks Wi-Fi Deal Will Represent a $50 Million or Greater Annual Investment by Google

Based on industry pricing, the Google deal to supply Wi-Fi services at 7,000 Starbucks locations could represent at least a $50 million a year investment by Google, based on what it is paying Level 3 Communications to supply and manage the access, according to estimates from D.A. Davidson telecom analyst Donna Jaegers.

That level of investment does not include money Google will spend to upgrade the Starbucks Digital Network experience, either. 

Consider that the sort of long-range investment Google previously has made in access capabilities, ranging from metro Wi-Fi to Google Fiber.

Cable Companies Earn More Than 25% of Metro Ethernet Revenues

U.S. cable TV operators earn more than 25 percent of Ethernect access revenues overall, and will earn perhaps as much as 33 percent in the near future, Heavy Reading says. 

Wholesale Ethernet is substantially outgrowing retail, expanding as a share of MSO Ethernet from 10 to more than 20 percent, including resold telco capacity and traffic delivered on their own facilities.

As you would guess, cable operators also are moving up the stack by adding more application-based, vertically-oriented services, expanding further into the enterprise space and downward into the smaller business segments.

By 2016, according to Insight Research, U.S. enterprises and consumers will spend over $44 billion on carrier Ethernet services, growing the market from $4 billion in 2011 to nearly $11.1 billion by 2016.

Will Telco and Cable Revenue be Lead, Anchored By or Exclusively Driven by High Speed Access?

Will high speed access be the primary telco and cable operator revenue driver in the future? Looking at mobile services, one would be quite tempted to argue that will be the case. In many markets, and perhaps globally, mobile data already represents the majority of revenue, if not the majority of users.

For both cable and telcos, high speed access is the biggest revenue growth category and legacy lines of business are receding, across the landline business.

So it might not be unusual that Cablevision CEO James Dolan has said in public that "there could come a day" when his company stops offering television service, making broadband its primary offering.

Time Warner Cable CEO Glenn Britt said in 2011 that broadband already is cable’s anchor service, a less dramatic of saying the same thing Dolan said.

Cablevision Systems Corp. has a rather long history of maverick behavior within the U.S. cable TV industry, notably investing significant sums in satellite delivered television ventures on more than one occasion, something other cable operators never did.

But Cablevision also went its own way even in more mundane matters such as the wavelengths it preferred for optical transmission, choosing to use the 1550-nm window rather than the 1310-nm window virtually all the other service providers preferred.

Some might say that explains the candor. Cablevision just isn’t shy about going its own way. On the other hand, one might also say Cablevision executives do not actually believe they will be running the asset when that happens, either. Sometimes imminent freedom creates more opportunity for telling the truth, as one sees it.

The day when high speed access, not video revenues, anchor cable revenues is but is a simple extrapolation from the declining percentage of revenue virtually all U.S. cable operators earn from video services, compared to other newer services, especially broadband, voice and business services.

The parallel statement would be the CEO of a tier-one U.S. telco or mobile services provider saying it could envision a time when the firm no longer offered voice services.

Whether telcos actually completely abandon voice, or cable companies completely abandon video, probably is not the question. The question is what drives revenue growth for either cable or telco providers, and the answer revolves around broadband and service provider roles as Internet service providers.

Looking only at profit margin, broadband is the most lucrative service, and arguably becomes the foundation access mechanism for an IP network, including some content and communication services, if not eventually all of them.

An analysis by IBM Global Business Services, for example, predicts just a few basic future outcomes, characterized either by consolidation, disaggregation (breaking the firms up into more specialized assets)or some shift to more horizontal revenue models.

One might argue for a future where some service providers are in the consumer segments, while others are in the business segment.

Either of those choices would involve significant structural change for any major telco, involving a huge amount of operating cost and capital investment reduction for the surviving units.

Orange Partners With Total for Africa Mobile Money Retail Distribution Network

It is some measure of the new services revenue challenge now facing communications service providers in the developed regions that mobile payment and mobile banking are serious initiatives.

By way of comparison, machine to machine services--using the mobile network as the communications link for sensors--is a no-brainer. Selling access and capacity to firms that need to monitor processes is quite closely related to selling access and capacity to humans who want to talk, text or surf the Internet.

But mobile services providers are pursuing a number of initiatives simultaneously, looking for the home runs among a variety of proposed new ventures. Mobile payments and mobile banking and mobile financial services are among those key efforts.

A new partnership between Orange and Total will provide “Orange Money” services to the operator’s customers at all Total service stations in all African and Middle-Eastern countries where the two groups are present and Orange Money is available.

That includes Botswana, Cameroon, Côte d'Ivoire, Guinea, Jordan, Kenya, Madagascar, Mali, Mauritius, Morocco, Niger, Senegal and Uganda.

Orange Money is Orange’s payment and money transfer service for Africa and the Middle-East. It enables Orange customers to transfer money from mobile to mobile, to pay bills and withdraw and deposit money through a network of certified distributors.

The deal illustrates the key role played by retail infrastructure in supporting mobile banking operations. As consumers need a place to recharge their usage balances, they also need a place to convert cash to mobile payment credit, or redeem such credit for actual cash.

And that’s where the network of Total gas stations plays a key role. Total  service stations are open for extended hours seven days a week and become, in effect, branch bank sites, where people can open an Orange Money account and perform withdrawals and deposits.

This first stage of the partnership is already operational in Senegal and Cameroon, and will go live in over 1300 service stations in the 11 other countries where both groups are present in the second half of 2013.

A second stage will follow, which should enable Orange Money customers to pay for purchases made in TOTAL service stations using their mobile account.

Mobile service providers already have discovered the strategic value of retail distribution for success of any mobile money initiative in Africa.

75% Mobile Voice Adoption in 5 Years, Where Just 13% Have Electricity?

Telenor Mobile Communications of Norway and Ooredoo of Qatar, the two new mobile service providers in Myanmar, face the challenge of getting 75 percent adoption of mobile voice in five years, in a country where just 13 percent of homes have electricity. 

The challenges of getting to a high level of mobile use therefore will require more than the  building of the mobile networks. An infrastructure of retail sales and support has to be created as well.

That will include places people conveniently can recharge their devices and pay for additional usage, assuming a prepaid model is common.

Less than 10 percent of the country currently buy voice services using a mobile or fixed network.

2 New LTE Licenses Awarded in Peru

Telefonica Moviles and Americatel Peru have won their bids for 4G spectrum licenses  in Peru, in auctions that raised US$257 million.

Peru’s Ministry of Transport and Communication (MTC) sold two 20-year, 40 MHz (2×20MHz) spectrum licences in the 1700MHz and 2100MHz paired bands (Advanced Wireless Services spectrum) for 4G services.

Movistar was awarded the ‘A’ block of 1700MHz/2100MHz frequencies.

Americatel Peru, the Peruvian arm of Chile’s Entel, won the ‘B’ block of AWS spectrum.

The two operators have been given six years to build out their networks across 234 districts in the country, with three years to provide coverage in Peru’s major cities.

Another smaller provider, VelaTel Global Communications, on the other hand, decided it could not obtain 4G assets in Lima, its core market, and earlier in 2013 made preparations to sell its assets.

VelaTel Peru historically offered fixed telephony services including interconnections, national and international long distance, and voice over internet protocol (VoIP) solutions. VelaTel Peru also was awarded radio frequency licenses to use 2.5 GHz spectrum to offer wireless broadband access services in eight of Peru’s largest cities (excluding the capital city of Lima and its suburbs). In 2010, VelaTel launched a network in the Peru market under the brand name GO MOVIL.

The Chinese company that owns VetaTel also has other communications assets in China, Europe and other parts of Asia.

Few Say They are Happy with Mobile Service, But Few Leave

If consumer dissatisfaction with mobile services is as significant as some studies suggest, T-Mobile US and Sprint have reason to believe they can disrupt the U.S. mobile market. 

On the other hand, both T-Mobile US and Sprint confront relative stability of consumer behavior, which works against the odds of major change.

Unhappy customers should suggest there is room for an attack. 

But there is lots of evidence that even unhappy customers do not abandon those products. That, for example, was true for decades in the U.S. cable TV business, where almost every survey found significant levels of dissatisfaction, and yet rather low churn rates. 

Even unhappy customers do not change service providers all that often, one might conclude from low churn rates that now seem to characterize the U.S. mobile market.

Of the roughly 326 million U.S. mobile accounts, about one percent a month of AT&T or Verizon Wireless seem to choose another service provider. 

About two percent of T-Mobile US or Sprint customers choose another service provider in a given month. 

That's low for a consumer service. In past decades, it would not have been unusual for more than three percent of a cable company's customers to stop buying service in any given month. 

Even churn among small business customers of most competitive local exchange carriers has run in the three percent a month range. 

To make matters harder for T-Mobile US and Sprint, churn performance has gotten better, for all four service providers. 

It might seem that unhappy customers do not leave, or that happy customers will desert a service provider, but both types of behavior seem rather common.

You might agree that even satisfied or very satisfied customers will leave their current supplier for a better alternative, even if they were happy with their original supplier. "Same features, lower price" typically is a reason for doing so. 

Perhaps the harder behavior to explain is an unhappy customer that does not leave. There could be a number of quite rational explanations for such behavior, though.

Experienced consumers might already have tried the other mobile service providers, and discovered that virtually every network, and every service,  has some strong points and weak points. 

Consumers might perceive one service to be superior, but also resist the higher price such a service carries. 

In other words, some experienced consumers might simply have learned from experience that no service provider does a consistently better job, provides the lowest price and best features. 

Think about the experience most people have with traveling by airline. In most cases, no matter the supplier, most travelers might rate the experience as troublesome on some dimensions. 

On the other hand, travelers might also say they prefer lower prices, and troublesome experiences therefore are caused by the very fact of the ability to obtain lower prices. 

One suspects something of that process is at work for mobile services. One way of putting matters: nobody is happy, but nobody expects any of the other alternatives to be consistently better. 

That is the challenge Sprint and T-Mobile US will face in attempting to disrupt the U.S. mobile market. Something rather more profound than what T-Mobile US, Sprint, AT&T and Verizon have been doing so far will likely be required to make a significant breakthrough. 

Price Anchoring and Gigabit Internet Access

You can assume many Internet service provider executives would argue that Google Fiber is priced too low. That would be a logical response by an incumbent to a disruptive price and value attack by a new competitor.

Google wanted to make a point by offering symmetrical gigabit Internet access for just $70 a month. In part, it wanted to prove that a brand new fiber to home network could be built to provide such connections, at unheard of prices, and still be a profitable venture, partly as a way of creating incentives for other ISPs to do so as well.

But some pricing specialists might argue Google Fiber's pricing was too low, and that other ISPs wishing to offer much faster Internet access should create their own much-faster services, but price a gigabit connection at higher levels, as much as $300, as many other ISPs have done.

The reason is price anchoring, the tendency buyers have to evaluate offers based in part on other information they have. For example, if a potential buyer learns that a “suggested” or “standard” price is $1,000, that buyer might be quite happy if the same product can be bought “on sale” for $500.

In similar fashion, buyers might conclude that a better immediate value proposition is a 300 Mbps access service, costing $150 a month, than a gigabit connection costing $300 a month.

Others might likewise conclude that a 150-Mbps service costing $75 also is something worth buying, especially if what they currently buy is a  20 Mbps connection for $50.

Whether it is too late for most ISPs to adjust is a reasonable question. Any ISP competing against Google Fiber is stuck: the market rate for symmetrical gigabit connections is $70 a month.

But in most markets, Google Fiber is not yet a product that can be purchased. So it might be possible, for some time, to offer a gigabit connection at prices high enough that most consumers wouldn’t buy them. But the anchoring effect will happen.

All of a sudden, a 500-Mbps service, at half the price of the gigabit connection, will seem more reasonable. Likewise, a 250-Mbps connection at a quarter of the price of the gigabit connection, will seem even more reasonable.

If the objective is to get customers to upgrade to 100 Mbps to 250 Mbps, setting a high price for a gigabit connection, and then essentially establishing a new mental image of what the value and price relationship is for services an order of magnitude faster than what most people buy, is possible.

That isn’t to argue for higher prices or lower prices, as a matter of course, but simply to point out that high posted prices sometimes can lead to higher perceived value, and higher purchasing, of other products whose value is anchored by the high value, high price of an anchor product.