Google Might Share Revenue with Mobile Service Providers Offering Google Wallet

"Slow" is a word many would use to describe progress being made by Isis and Google Wallet as other contestants including PayPal seem to be getting traction by taking less complicated routes to market.

There now is speculation Google might be considering sharing revenue with carriers such as Verizon Wireless and AT&T if they support Google Wallet on their devices, Bloomberg reports.

That Google would be considering ways to accelerate progress is not surprising. Neither Google Wallet nor Isis have moved as fast as many had hoped would be possible.

There might be incentives for the carriers, though. In addition to the revenue sharing, Google also could shift gears in another direction and build a system that relies on upgraded retail point of sale terminals without using any features of the phone, a move that would cut the mobile service providers out of a role in the payment process.

The approach would avoid using the phones--or related servers-- to authenticate purchases and accounts, instead using only a new network of servers. In part, such a move would conceivably allow Google Wallet to accelerate adoption by taking the phone out of the picture as a "gating" factor, much as PayPal has been doing.

Though it is counter-intuitive that taking the "mobile" out of mobile payments would make sense, getting wider adoption, faster, is important in a new market. Whether end users or retailers care very much about "how" the new payment features work is open to question.

If Google Wallet gets wider adoption, with or without direct use of the phone, it has more opportunities to add phone-based approaches incrementally.

Does Video Entertainment Competition Affect Rates?

Competition is supposed to improve consumer welfare by driving prices lower. Perhaps oddly, that does not necessarily seem to be the case for entertainment video prices, at least when looking narrowly at prices for the "expanded basic" tier of service offered by all video service providers.

Over the 12 months ending January 1, 2010, the average price of expanded basic service increased by 3.2 percent, to $54.27, for consumers living in communities where there is "no effective competition," according to the Federal Communications Commission.

For the effective competition communities, the average price of expanded basic increased by 4.6 percent, to $54.77, the FCC study suggests. "What?" you might be thinking. Prices rose more in the competitive markets than in the non-competitive markets? At least for the expanded basic tier of service, that was the case.

That does not mean the same relationship might hold if all fees and features are considered. But the averages of the price differentials for three service packages (basic, expanded basic, next tier) overall between the effective-competition and the non-competitive groups are not statistically significant, the FCC says.

In addition, in contrast to prices charged prior to 2009, expanded basic prices are growing fastest in the effective-competition communities, at 4.6 percent over the 12 months ending January 1, 2010, compared to 3.2 percent over the period for non-competitive communities.

Of course, it always is difficult to measure "productivity" or "value" for products whose characteristics change over time. Whatever the changes in nominal prices, there now are more channels offered in the "expanded basic" tiers, so that the cost-per channel is lower.

Over the study period, price per channel declined by 6.1 percent in non-competitive communities, to
58 cents per channel, and by 10 percent in effective-competition communities, to 51 cents per channel.

Nominal prices, in other words, do not capture the enhanced value provided the added channels. Consumers, though, do not pay on "price per channel," but simply the nominal package price, so that distinction might not be "consumer relevant."

The price per channel is 12.3 percent lower in effective competition communities than in non-competitive communities, which reflects that operators in effective competition communities carry more channels on expanded basic service than in non-competitive communities.

"Research Online, Purchase Offline" is Big, Growing, a Driver of Mobile Commerce

In the G-20 countries, consumers researched online and then purchased offline (ROPO) more than $1.3 trillion in goods in 2010, the equivalent of about 7.8 percent of consumer spending, or more than $900 per connected consumer, according to the Boston Consulting Group. 



ROPO provides an indication of why mobile shopping—using a smartphone to identify deals, compare products and prices, and “seal the deal” while on the go—is becoming more important worldwide.

As device prices fall, especially in developing markets, increased smartphone penetration will have a dramatic impact on both retail commerce and e-commerce—further blurring the lines between online and offline buying, BCG argues.

Do Comcast and Verizon Really Compete with Apple, Google?

One can argue that the recent agency agreements signed between Verizon and Comcast, Time Warner Cable, Cox Communications and BrightHouse are deals that could reshape the nature of local access competition in the U.S. market.

Some will argue that deals signal a division of effort that has the cable partners focusing on landline services while Verizon handles the wireless business, without a formal merger between the companies.

Call it what you like, one might make the argument that, essentially, the firms are carving up "spheres of influence."  One would be harder pressed to make the argument that Verizon thereby avoids investing in the latest generation of access technology. Verizon already has done so, in nearly all its markets, with a couple of major exceptions.

But rhetorical flights of fancy and feints always are part of the game when such deals require any sort of finding that the deals are "in the public interest." We are likely to hear at least some of that as the Federal Communications Commission weighs its approval of spectrum transfers that are not formally part of the agency agreements.

Skeptics will be watching for signs of a long-familiar tactic, namely misdirection. "Look there, not here," is essentially a tactic sometimes used in such campaigns.

Some might say that is at work when the partners seriously argue the deals are necessary so they can better compete with the likes of Google and Apple.

Ignore for the moment the issue of whether participants in any ecosystem successfully can take over roles held by other key participants. There are reasons enough to doubt the success they could potentially have on that score.

Ignore for the moment the potential impact on local access or wireless competition. Consider only the issue of access providers arguing they need to, and will, compete with their application and device partners.

If serious, that implies the device and application providers will have even more incentives than they already do to reinforce the loosely-coupled way they work with access providers. In simple business terms, "if you try to minimize me, I will try to minimize you."

That is not to say areas of overlap will exist at the edges. Access providers have been app providers in the past. Access providers sometimes have dabbled in the device arena.

App providers do offer features and services that are competitive with, and displace, some service provider apps.

But one has to wonder. If channel conflict continues to escalate, and if in fact four major mobile service providers suppliers actually are too many for the U.S. market to support, long term, whether currently "unthinkable" courses of action might become practical.

No industry in the U.S. economy seems to pile up free cash more than the application provider business. Apple alone has enough excess cash that it has started to pay dividends.

It is true that no major application or device manufacturer really "wants" to be a service provider. On the other hand, firms such as Apple famously are concerned about securing their supply chains. And "access" might someday be seen as a more-vital part of an application or device supply chain.

So, potentially, access providers and app and device providers could wind up competitors rather than collaborators. There is a dynamic tension in the ecosystem. Whether that becomes a destabilizing tension is yet to be seen.

Is "Breakage" the FreedomPop Revenue Model?

“Breakage” might be the biggest near-term revenue generator for “free” mobile broadband provider FreedomPop, which plans to give away 1 Gbytes worth of usage for customers who could pay $10 per gigabyte for usage above the first 1 Gbyte of usage.

There are a couple of salient “angles” here. First, there is the emphasis on “mobile broadband,” not voice. FreedomPop does not sell voice. Also, there is the “freemium” business model. Then there is the issue of the use mode, which some will find a bit kludgy.

FreedomPop works by wrapping a case around an iPhone 4 or iPhone 4S, containing a WiMAX radio so users can communicate with the Clearwire network, which is providing the access. The kludgy part of the deal is that users cannot use their voice functions when the case is on.

There are some people who will put up with quite a lot of hassle to use some app or service “for no incremental charge.” The issue is how many.

Apparently there also is a $75 deposit to use the case. One wonders how many cases will be returnable in usable condition, essentially making the case a $75 upfront investment. That wouldn’t be unusual, though. Dongles or other devices used to access mobile broadband can cost more than $100 to couple of hundred dollars.

What is important here is the potential level of success. Can FreedomPop create a viable business offering mobile broadband on a freemium basis? Will users accept some of the limitations? In addition to breakage, what other for-fee services or features will emerge?

Sprint Has "Apple" Issues

Bernstein analyst Craig Moffett downgraded Sprint shares to "underperform" from "market-perform," and more significantly thinks there is a risk Sprint could go bankrupt in about four years. You might wonder why.

Moffett argues there is potential danger ahead because of Sprint's heavy debt loads. Heavy debt frequently is an issue that trips up lots of firms. Nor is the need to invest heavily in new generations of technology.

For Sprint, perhaps more so than for other service providers in the U.S. market, there are investment issues related to a specific device. Some time in 2012, it is possible Apple will introduce Long Term Evolution versions of the Apple iPhone.

The problem is that Sprint does not, in Moffett's opinion, have the ability to buy or clear enough spectrum to compete with iPhones using Long Term Evolution expected to be offered by AT&T and Verizon Wireless.

You might be tempted to argue that Sprint simply can sell other devices, and doesn't "need" the iPhone. But Sprint, and most observers, thinks Sprint has to offer the iPhone. Many would say T-Mobile USA's current issues with subscriber growth are a direct result of its inability to sell a version of the iPhone that works on its network.

"We expect Sprint’s competitiveness to begin to backslide when LTE becomes the nation’s de facto standard,” Moffett says.

"To be clear, we are not predicting a Sprint bankruptcy. We are merely acknowledging that it is a very legitimate risk. And notwithstanding a recent rally in Sprint shares, we believe that risk is rising," Moffett said in a research note.

Moffett said he does not expect Sprint to file for bankruptcy any time soon. But he cautioned that it is due to repay $2.6 billion of its debt in 2015, the same year $3 billion in debt comes due for Clearwire Corp, which is majority owned by Sprint.

Sprint already has made a $15.5 billion commitment  to buy iPhones from Apple over the next few years, whether or not Sprint can sell them.

Sprint is also embarking on a $7 billion network upgrade to support LTE, but some worry spectrum could be an issue, in addition to increasing Sprint's debt load.

It might be stretching matters just a bit to say the Apple iPhone now has become a problem that will cause Sprint to fail, financially. But the iPhone appears to be a significant driver of capital investment Sprint cannot easily afford.

Mobile and Untethered Trends Raise Key Questions

Mobile is by far the biggest part of the global telecom business, and service provider revenues tell only part of the story. “Untethered” is the other big part of the story. By some estimates, for example, about 90 percent of all tablets sold use Wi-Fi-only connections, meaning those devices are used untethered, but not in fully-mobile mode.

Other measures of consumer and business spending also point to the growing importance of mobility, and account for the “mobile first” orientation many application providers now take. You might intuitively guess that there are potentially huge implications for communications service providers, both positive and negative.

If we look at the US household information technology spend (including PCs and all other “information” technology), over 50 percent of that spend now goes to mobile, according to Chetan Sharma. On average, wireless spend represents 31 percent of total telecom spend, according to Research and Markets.

U.S. and U.K. enterprises are embracing mobile at an unprecedented rate, according to Antenna Software, with average current investments of $422,000, rising to $926,000 by the middle of 2013, according to a study conducted by Vanson Bourne.

Mobile revenue is about 4.5 times bigger than fixed network revenue, and it has been that way for several years. In a literal sense, the global telecommunications business has become a largely mobile business, with some important fixed line applications and revenue sources.

"Mobile first" therefore has become the important element of strategy for a growing number of application providers better known for their PC-based features and use cases.



You might suspect those sorts of statistics might have huge implications. They probably do, especially for fixed-line communications providers.

“In their current model, some traditional telecoms companies will not succeed,” says Roman Friedrich, Booz & Company analyst, the Financial Times reports. But just what might mean is difficult to foresee at the moment.

Still, it is instructive that, increasingly, there is talk of the extent to which “telcos” compete with the likes of Google and Apple.

The European Union’s telecom regulator, for example, now is investigating whether Vodafone , France Telecom, Telecom Italia, Deutsche Telekom, and Telefonica, as well as to the telecom he GSMA, have violated anti-trust law by trying to create a mobile payments consortium and service.

Google has a major “mobile wallet” service under development, and most observers expect Apple to enter the business in some way, as well. Some mobile service providers want to create their own application stores to compete with iTunes, the App Store and Google Play, as well.

What is interesting, of course, is that Apple is largely a device manufacturer, while Google largely is a software company, though each competes in both hardware and software to some degree.

Essentially, contestants in the communications and entertainment ecosystem are finding they increasingly must compete not only with other competitors within a portion of the ecosystem, but even to a certain extent with partners in the rest of the ecosystem. That’s the sense in which there is validity to assessing how much, and where, telcos and cable companies might actually find themselves competing with traditional partners in the value chain.

Some would say the significance of the European service provider moves are all of the efforts to develop new services ranging from mobile advertising to new messaging technologies to counter competing and often free services from Apple and Google.

That sort of creeping competition between “access providers” and “handset or application providers” might be viewed as a logical extension of current roles into adjacent business roles.

But that raises a bigger question: to what extent is it even feasible for access providers to consider abandoning that role within the ecosystem. In other words, are they network players or not?

There is a “soft” way of answering that question, and a “hard” alternative. The soft answer is that a specific company continues to offer access or transport services, but sources them from a third party.

As a mobile virtual network operator buys capacity from an underlying carrier, or a competitive local exchange carrier buys wholesale service from a third party, so a “soft” way of answering the question of whether a network services provider continues to operate is to say “yes,” but with an increasing emphasis on other ecosystem roles.

One example is the difference between a firm that sees its competencies in “marketing” rather than “network management.” That sort of firm might be comfortable sourcing access and transport from third parties. A firm that believes its core competence lies in networking will generally prefer to own its own network assets.

The more radical “hard” answer is that a company literally divests network assets and seeks its fortune elsewhere in the ecosystem. That so far has seemed an unworkable strategy.

But it is not unknown. The 1985 divestiture of the Bell System had AT&T completely getting out of the access business, to focus exclusively on long distance and technology services (Bell Labs and Western Electric). In essence, AT&T became a technology supplier and long distance specialist, and not longer was a “telco” in sense of providing access services and “dial tone.”

Rochester Telephone in the 1990s essentially gave up its local exchange monopoly, creating a separate wholesale access company and then a separate retail services division. The deal was part of a larger bargain that gave Rochester Telephone the right to create a long distance services business, at the time seen as the faster-growing revenue opportunity.

In similar fashion, Singapore Telecom gave up its own retail monopoly in exchange for freedom to pursue offshore growth opportunities.

In those cases, an incumbent gave up ownership of the “networks” business to become just one of many local retail providers. To be sure, Rochester Tel and SingTel continue to sell access services, but don’t own the networks.

The more radical, “hard” strategy would have had either firm abandoning the access business entirely.

That probably still will be an exceedingly rare occurrence. What could prove less rare are divestitures of whole parts of an access business though, as if a firm divests landline assets to become a wireless “pure play.”

The point is that it would at one time have been meaningless to talk about direct competition between an application provider or device manufacturer and a telco or cable company. That increasingly is less true. 

source: Martin Geddes