Two Different Responses to Mobile Shopping

Target and Sears are taking diametrically opposed approaches to the challenge of mobile-enhanced shopping, in particular comparison shopping while potential customers are inside stores. 


Target wants its suppliers to create "retail store only" versions of products that cannot be bought online, as well as helping Target match online prices. Target is particularly concerned about showrooming, the practice of consumers examining merchandise in a store, but buying online. 


Sears, on the other hand, is going to make it easier for mobile shoppers to compare prices inside Sears locations, by adding Wi-Fi, at least at some of the Sears stores. 


In fact, Sears is by offering in-store shoppers free Wi-Fi access at select stores, to provide customers with faster access to the merchant’s mobile commerce site and apps. That isn’t completely surprising.

What is more interesting is that Sears also will allow those users to access the sites and apps of other retailers, a move intended to show Sears comfort with its pricing.

With free Wi-Fi customers can use their smart phones to surf the web, shop online at Sears.com or compare prices before they purchase to make sure they are getting the best price on the products they want, the company says.

About 63 percent of smart phone users have visited a retailer’s website from their mobile device, up from 53 percent in 2010, and 41 percent have done so while in the retail store, according to a study by Hipcricket.

While mobile retail sites have historically served as “brochures,” lightweight versions of retailers’ full websites that provide limited information such as store locations, directions and hours, today’s mobile-specific retail sites are now providing more significant benefits to consumers as they move along their path-to-purchase.  

Fully 50 percent have checked a competitor’s mobile website while in another store.
The survey found that smart phone owners are visiting mobile retail sites to:

Research prices (46 percent);
Search for coupons and offers (36 percent);
Research products (28 percent); and
Purchase products (13 percent)

Some nine percent report that any of their favorite brands market to them using the mobile phone. At the same time, consumers continue to indicate a willingness to join mobile customer relationship management or loyalty programs for their favorite brands. Some 33 percent would be interested in joining such a program, but only 12 percent currently participate in one.
Mobile sites now a factor in retail shopping

Some 79 percent of U.S. smart phone owners relying on their phones to help with shopping, according to Google.


 

About 70 percent use their phones while shopping in-store and 74 percent of smart phone shoppers made a purchase as a result of using their smart phone.

Some 67 percent said they research on their smart phone and then buy in the store. Fully 95 percent of smart phone users have looked for local information, and as you might expect, such searches often are an immediate precursor to purchasing.  After looking for local information, 77 percent contacted a business, and 44 percent made a purchase. Reaching Today’s Mobile Shoppers

Text Messaging Maturing, Begins Decline

There is growing evidence that the high-margin mobile text messaging market is past its peak.

Danish SMS traffic, for example, decreased by over 20 percent in the first six months of 2011, according to Strand Consult, and the trend will continue in 2012.

Social media networks appear to be the reason people are sending fewer text messages.

Text messaging volumes and revenue are not declining in all markets, but is slowing in most developed markets. The most-recent data from the CTIA suggests slowing growth in the U.S. text messaging market of about nine percent.

In the Danish market,  three out of four mobile operators have been experiencing a steady decrease in their test messaging (short message service, or SMS) traffic month after month.

From 2010 to 2011, TDC experienced an SMS traffic drop of 17 percent, Telia lost 18 percent and Telenor 26 percent, while the fourth operator 3 was the only operator that had growth in their SMS traffic.

That 3 saw text messaging growth is largely attributable to the fact that 3 is gaining customers and share in the market. SMS traffic on the 3 network grew by 29 percent.

But, overall, the number of Danish SMS messages fell during the first half of 2010 to 6.4 billion and to 6.2 billion during the first half of  2011. That is a drop of about seven percent from 2010 to 2011.

Facebook messaging is the reason for the drop, Strand Consult argues. We often forget that all products have a life cycle. Fixed line voice is past its peak, and now text messaging likewise seems to be nearing or past the peak of its product cycle in some markets, though it will continue to grow in other younger markets.

So what are Danish operators doing? They are bundling mobile broadband with SMS and MMS packages as part of a smart phone purchase. That means service providers get paid even as the volume of text messages declines. 

There is

Finland's largest carrier, Sonera, for example, recorded a 22 percent decline in texting on Christmas Eve in 2011, versus the same night in 2010.

It isn't that people are communicating less. They are just using different methods of communicating. Text Messaging Declines  

Hong Kong also apparently saw a similar decrease on Christmas, dropping 14% from the same day in 2010. Netherlands service provider KPN provided an early warning when it announced significant declines in messaging volume earlier in 2010. KPN text message declines

Dutch telecoms regulator, OPTA, which shows a significant decline in the number of SMS sent in the Netherlands in first half of  2011 compared to the previous six-month period.

The country's largest operator, KPN, has also reported declining year-on-year messaging volumes over the last few quarters due to what it calls "changing customer behavior."

Wireless Intelligence says text messaging volumes are falling in France, Ireland, Spain and Portugal as well.

According to OPTA, the total number of SMS sent in the Netherlands stood at 5.7 billion for the first six months of the year, down 2.5 percent from 5.9 billion in the second half of  2010, even though total text messaging revenue rose slightly (0.6 percent) to EUR378 million during the period.

That should not come as a surprise. The number of over the top and social messaging alternatives has been growing for years. But there is a "network effect" for messaging, as there is for any other communications tool. Until a user is fairly sure that nearly everybody he or she wants to communicate with can be reached by a particular tool, adoption is slower.

But there always is a tipping point, where the expectation changes from "I doubt this person uses this tool" to "there is a good chance they use this tool." Finally, there is the point of ubiquity, when the assumption simply is that "everybody" uses the tool.

Also, the history of text messaging and email are instructive. Though most cannot remember a time when it was so, email and messaging services once upon a time ere not federated. In other words, you could not send messages across domains.

History also tells us what happens after federation: usage explodes. With alternative messaging platforms, we still are not in a "full federation" mode, where anybody can send messages to any other user, irrespective of what device, operating system, service provider or application they prefer to use. That day will come, though.

The.maturing market seems now to be a growing factor in the text messaging part of the mobile business.

Are Device Subsidies Bad for Consumers?

Some would argue that mobile device subsidies, which require end user contracts, represent unfair competition in a market where some larger providers can afford to make the offers, while others cannot. Those subsidies are substantial. In some cases, the subsidy can run as high as $500 on some devices.

Others would argue that contracts and subsidies also are anti-competitive to the extent that use of contracts hinders consumer choice, as the contracts lock users into relationships with specific carriers.

Others would argue that device subsidies are one reason so many consumers can afford to buy and use advanced smart phones that often cost as much, if not more than a PC.

In fact, some would argue that the net present value is better, for a consumer, when choosing not to sign a contract. Yell now if you know any consumer that ever has conducted an NPV exercise before buying a device or service.

One can argue that consumers essentially are “dumb” when they choose to buy subsidized phones and sign contracts. Others would argue the behavior not only is quite rational, but provides more value.

The argument for not buying a subsidized device that comes with a contract is that there is a risk of having to pay an early termination fee, or that the recurring fees of a contract plan are higher than otherwise would be the case.

Those assumptions do not generally apply, would might argue. Not every consumer ever pays an early termination fee. Perhaps few do. For a consumer that never pays an ETF, it is not part of the value equation at all.

Nor is it the case that a month-to-month recurring fee is lower than would be the case under contract. As often as not, it will cost just the the same, either way, and could cost more, in the non-contract case.

Consumers do have the choice to buy a prepaid plan that will offer lower recurring fees. But they generally will lose access to the full range of handsets, and will have to pay the full retail price for their handsets. Figuring out the actual NPV of such deals is complex. Users pay more cash up front, but lower recurring fees

So one major variable is the cost of the device and the length of time that device is used. That generally means a tougher business case for a younger consumer than an older consumer, as younger users break or lose their phones more often than older consumers do, and younger consumers are more apt to buy a new phone for fashion or application reasons unrelated to whether the device still works.

That said, in cases where a consumer has to pay an early termination fee early in a contract (the fee is pro-rated), an argument can be made that the NPV would have been better if the contract had not been signed.

Contracts, some argue, also are “unfair” to consumers, which might not be the same thing as a less-favorable NPV. The reason is that the actual value of a handset subsidy is rarely clear to a consumer.

The device “retail” price, which is typically compared to the subsidized price, might or might not capture the actual value of the discount, since a consumer doesn’t know what a particular service provider actually paid for the devices.

The same objection can be made about early termination fees that might be likened, when imposed, to a consumer making a loan to the service provider. Some would argue that the pro-rated ETF fees are levied at rates above the simple amortization rate of the ETF over the two-year contract term.

In other words, if a consumer has to pay even the pro-rated ETF, a simple amortization rate might imply reducing the rate about $14 a month for each additional month of service. Instead, service providers reduce the rate about $10 a month for each month of contract service. That $4 a month “excess” is essentially an “interest” payment, some would argue.

Likewise, the handset subsidy might be likened to a  is a loan that is repaid over the life of the subscriber contract.


Are subsidies loans? Some might argue a handset subsidy is a loan made to a consumer that is repaid over the length of the contract term. The logic there is that the ETF should reflect the actual value of the handset subsidy.

“If the actual cash subsidy is equal to or less than the initial ETF, then the way in which ETFs are administered today produces punitive results for subscribers who terminate their subscriber contracts early,” argues Dave Selzer , JSI Capital analyst.

Some of us would argue that, in most cases, the device subsidies, with contracts, actually are positive for end users, service providers and device innovation. That is not to ignore the growing cost to service providers of providing the subsidies, the potential ETF exposure for consumers or potential danger to device suppliers if the subsidies were to go away.

The simple argument is that device subsidies allow consumers to buy advanced devices they would otherwise not be able to afford, or not want to buy. Service providers sell more data services when they sell the subsidized smart phones and reduce churn. Device manufacturers have larger markets, since consumers replace their phones at a higher rate than they would if the subsidies were not available.

All application providers win because device replacement is the primary way new app behaviors are stimulated.

Nevertheless, the subsidies cause cash flow drag for service providers, and seem to be a growing burden, in that regard.

On the other hand, subsidies and contracts do minimize churn and do support average revenue per user. Those effects are important for public companies.

Would carriers offer the subsidies without some assurance they could earn back the cost of the subsidies over time? Would carriers rather sell devices at twice current prices, or higher? Would they prefer to raise rates? You can make your own guesses in that regard.

That is not to say different packaging is inconceivable. If you assume the subsidy represents $300 to $400 of real costs to a carrier, it might be possible to offer a plan with full-price device purchase, with free service for a period of time or perhaps lower recurring prices.

The details might vary, but a revenue-neutral solution could be imagined. The downside is that predictability of revenue would decrease, since consumers could desert, without financial harm, at any point after the promotion ended

The potential changes in how service providers compete, in a regime where there are no device subsidies, is likewise unclear. All service providers prefer device exclusivity when they can afford to pay for it. That might not change.

But higher device prices would encourage more buyers to shift to prepaid plans that are far less lucrative for service providers. Fewer might buy advanced devices. So innovation would slow. That isn’t helpful for anybody in the ecosystem, as it is the promise of new services and applications that could allow service providers to keep growing revenues as demand for basic voice and messaging declines.

Device subsidies are an issue that contracts address. Contracts smooth out revenue, raise average revenue per user and reduce churn. Whether there is a way to preserve those advantages some other way is an interesting question.

So far, the largest mobile service providers, who live mostly on the strength of postpaid accounts, have been unwilling to rock the boat by switching to some packaging method that does away with the subsidies.

Whether they ought to do so also is a key question. Many business models are built on subsidizing one element of service to make money elsewhere. Amazon seems to be subsidizing devices to sell content, while Apple subsidizes content to sell devices.

Mobile service providers subsidize devices to sell recurring service. In principle, mobile service providers could offer inducements other than cheaper hardware, ranging from free domestic calling or messaging to lower recurring prices.

Whether the value of those inducements to consumers is higher than "cheaper devices" is hard to determine. Also, any other inducement would involve a revenue exposure of some size. Right now, messaging is the service with the highest profit margin and voice is the product with highest revenue contribution, though matters will change over time.

Whether prices and packaging for recurring services matter as much as cheaper phones is the issue. Also, there is no question but that devices increasingly are the value that provides the greatest demand "pull" in markets where "everybody" buys mobile service.

Nobody really "loves" their service provider, much less the ability to communicate, as much as they love their devices. Price is never unimportant. But price differentiation can only go so far, one might argue, as key competitors in each market segment pay close attention to competitor prices and offers.

Are Phone Subsidies a Bad Idea for Service Providers?

Handset subsidies largely are responsible for rapidly increasing smart phone penetration. On the other hand, the subsidies put pressure on service provider profit margins. Assume a service provider subsidies a device at about 50 percent of its actual cost, in exchange for a two-year service contract.

A device that costs the service provider $400 might be sold for $200, with the subsidy value recouped over the life of the service contract.

One might say handset subsidies are a necessary evil, allowing service providers to more easily acquire new customers, reduce churn and increase sales of smart phone data plans.

Typically, smart phone users commit to new multi-year-term contracts and generate average revenue per unit nearly twice that of voice-only consumers.

But handset prices are a major issue for consumers, in China and elsewhere.

But there is a price: the subsidies are a real cost of acquiring customers and reduce both cash flow and operating margins.

“In Canada, operators are seeing the benefits of higher sales and upgrade volumes largely wiped out by the impact of discounted handset pricing,” says Joss Gillet, Wireless Intelligence senior analyst.

The acquisition cost handset subsidies represent is in the range of $350 to $400 per new subscriber in Canada, and about the same amount in the U.S. market.

Nevertheless, Canadian operators value these costs as positive investments since they help to acquire and retain higher ARPU, lower-churning customers on longer-term contracts.

In markets that are saturated, there now are pressures to reduce subsidies. But nobody really can predict what will happen if service providers do so. One has to think (economics suggests higher prices for any product people want will lead to lower demand; while lower prices lead to higher consumption) much-higher handset prices will reduce purchases of new handsets.

At the very least, that will reduce the rate of innovation in devices, as users will refresh their devices at a slower rate, and it is device innovation that drives change in the mobile business.

Lower subsidies also will drive consumers to buy less-expensive devices, as well. On the other hand, at least some might argue that service providers should “double down” by extending contracts and refresh cycles, essentially gaining longer contract terms at the price of more-rapid refresh rates.

Some might say the solution is simply to provide more prepaid options for consumers. Such plans require that users buy their phones at full retail prices. But that also means there is no need for an operator subsidy.

But service providers also differentiate postpaid service from prepaid by the selection of devices. Typically, the hot new devices only are available on postpaid plans, in part to encourage purchase of the higher-margin postpaid plans.

If for no other reason than the differences in average revenue per user and profit margin, it seems unlikely service providers will want to shift too far in the direction of greater sales of prepaid plans.

Another tactic, namely making less costly phones available, will likely be preferred. But some of that potential also depends on supplier ability to create attractive devices at lower cost, as well as user willingness to buy those devices.

So far, no service provider has been willing to take the risk of selling even the most highly desired Apple iPhone without a subsidy. Whether a workable solution can be found--allowing service providers to reduce subsidies without losing customers--remains to be seen.

Some might say the consumer net present value actually is higher when users do not buy on contract, the logic being the early termination charge that could apply. But consumers do not perform an NPV calculations when shopping for a new phone or new service provider.

Also, one might argue that the potential payment of an early termination fee is about the same as the incremental cost of a full-price phone, so that in most cases there is not much difference between buying a subsidized phone under contract, and paying full price for the device to avoid the contract.

Each consumer has to make their own evaluations, but the evidence so far suggests buyers prefer the subsidies, even if they don't like the contracts. It's a bit like attitudes and behavior in the video entertainment business.

People always tell researchers they don't like advertising. But if you ask whether they would prefer to get free or highly-discounted content they want, in exchange for ad exposure, they vote for ad exposure.

Service providers would prefer not to have to provide subsidies. Consumers would prefer not to have contracts. But consumers clearly prefer less-expensive prices for their devices. In a business where the enabler of service--the phone--costs more than a PC, subsidies probably are necessary.

Google’s Mobile Ad Revenues $7 Per Smart Phone

Cowen Group equity analyst Jim Friedland estimates that Google is generating $7 per year from each smart phone and tablet now used by mobile consumers globally. 


That figure includes both search and display advertising in mobile apps on both Android and iOS (iPhones and iPads). 


Active smart mobile devices worldwide reached 509 million in 2011, and are projected by Friedland to reach 914 million in 2012.


Based on that figure, Google’s mobile ad revenues could more than double from an estimated $2.5 billion in 2011 to $5.8 billion in 2012. 


As a percentage of Google’s total revenues, Friedland estimates that mobile grew from three percent in 2010 to seven percent in 2011 and will almost double again to 13 percent in 2012. 


By 2016, he expects mobile to be a $20 billion business for Google, and represent 26 percent of its total revenues. Google’s mobile ad revenue $5.8 Billion in 2012?


That suggests the magnitude of the challenge facing mobile service providers who generally consider mobile advertising one of a small handful of growth opportunities lucrative enough to contribute significant incremental revenue once mobile broadband the current growth driver, starts to saturate. 


If any mobile operator were to do as well as Google now does, that would work out to about $1.17 a month of incremental revenue per smart phone user, per month, at a $14 annual run rate. Consider that current revenues for voice, texting and data can run $75 per user, per month. 


Of course, the problem is that some current revenue contributors, especially voice and messaging, slowly are declining. And some observers think capital investments and operating costs actually could go negative, in many markets across Europe, North America and the Asia-Pacific region as early as 2015. 


Mobile advertising, mobile payments or machine-to-machine services, as well as cloud computing and other initiatives simply will not contribute significant revenues over the next five to 10 years, during which mobile service providers will have to rely on mobile broadband to fuel revenue growth.


Though not every mobile service provider will face such issues, many mobile executives will be facing huge profitability challenges between now and 2016, according to Juniper Research, which forecasts that mobile service providers face potential capital investment and operating costs that actually exceed revenues by about 2014, Juniper Research says. 

Separately, analysts at Analysys Mason concluded that carriers in many regions around the world face the risk of an "end to profit" in 2015 if not before.

A study carried out by mobileSquared surveyed 31 global mobile operators and found that one third of operators already see traffic and revenue decline, while 75 percent of are worried about losing revenues to mobile application providers.

The research confirmed that over-the-top apps already are affecting traffic and revenues. Some 32 percent of respondents thought operator traffic from messaging, voice and video calling would decline between 11 percent and 20 percent over the next five to 10 years. About 20 percent of respondents estimated revenue would fall 31 percent to 40 percent over the next five to 10-year period.

The problem, according to Juniper Research, is that profit margins are running between 15 percent and 20 percent, which means many service providers are at about break even.

By 2015, costs will exceed revenues slightly, and fall below capital and operating expense by about 2016.

Separately, analysts at Tellabs also predict that revenue could fall below costs "within four years."

The Analysys study assumes a continuation of current cost and revenue trends, especially the current pricing of bandwidth. The findings also suggest the immediate need mobile service providers have for changes in retail packaging and pricing to keep revenues above cost. 

In the near term, increasing data revenue per subscriber is about the only way mobile service providers will avoid a dangerous turn towards sustained financial losses. 

Algorithms Now Drive Advertising

Measured by dollars or by impressions, greater than 50 percent of online advertising is bought using "algorithms" that purport to demonstrate return on investment. 


In the future, some believe, 90 percent of all digital ad impressions, and more than 75 percent of digital ad dollars, will be bought and sold using such algorithmic methods. Content still matters, but algorithms drive buys

For better or worse, media and advertising are driven by the numbers. One has to hope that many intangibles can be quantified accurately and with relevance. There is no way to stop the drive for algorithmic buying. Online, print shifts

Strong Ties, Weak Ties in Facebook

A new study commissioned by Facebook suggests that the social network sometimes is an "echo chamber," but not always. 


The study of sharing habits of approximately 283 million Facebook users shows that much, perhaps most, sharing activity and influence is with "friends. That should come as no surprise, since that is the way Facebook is structured. 


The issue is the extent to which shared items affect people with whom any single user has only "weak ties," including people you do not know, as well as with people you know well, such as good friends, co-workers and family. 


Researchers looked at the extent to which strong and weak ties affect the likelihood that "novel" or unexpected new information is received from other people with whom any user has "strong ties," compared to "weak ties."