How Firms Cope When Prices Decline "Nearly to Zero"

The long distance part of the telecom industry was first to encounter pricing trends that first erased formerly healthy profit margins, then got worse and lead to lower gross revenue. Now that seems to be happening for other "local" telecom services, cross-border mobile roaming, mobile voice and mobile messaging. 

Sooner or later, the same could happen to video entertainment services as well, though the barriers are much higher. Looking at the mobile payments space, some of us would argue that the same trend is about to hit the payments business as well. As was the case with long distance pricing, the trend could take decades to play out. But the same set of pressures seem to be building.

Some of the pressure in the payments business is imposed by government edict, such as rules that unilaterally lower the permissible charge to a retail merchant for processing a debit card transaction. Retailers naturally prefer lower charges, so it is logical that new contenders are going to pitch their services by promising lower transaction fees.

Over time, as the revenue and margin from "transaction processing" drops, businesses that make a living from transaction fees will have to find other ways to generate their revenues.

More than 15 years ago, looking at global deregulation, privatization of formerly government-owned firms, Moore’s Law, Internet Protocol, optical fiber and signal compression, it was not too hard to make the argument that the declining “revenue per minute” trend in the telecom business was inevitable, and destined to continue. 

In the payments business, at least one firm, LevelUp, already is promising retailers "zero" interchange fees. The catch is that LevelUp still has to pay those fees to the card associations (Visa, MasterCard, American Express, Discover). So how will LevelUp earn revenue? By providing marketing services, earning revenue on a "pay for performance" basis.
Believe it or not, firms in such businesses--literally facing their per-unit prices under retail pressure--can survive such changes. It isn't fun, but it can be done. 

The question then was "what does a telco do" if its primary revenue stream (cents per minute of use) approaches zero?

Only over time has the “answer” developed. Telcos have not gotten out of the subscription communications services business. But mobile services, fortunately, have replaced fixed network services as the industry revenue driver, aided by the emergence of broadband access and video entertainment services.

It isn’t so clear which particular new revenue models will develop in the payment transaction business. The answer might even take decades to emerge. But it is coming.

Firms in industries whose primary products face pricing pressures so severe that they undercut the primary industry revenue stream can adapt. But not always. Sometimes they fail. Many newspapers and magazines have been unable to find replacement revenue streams and simply have gone out of business.

One might argue that the business of processing retail payments is not something likely to disappear. But how that function is provided, at a profit, might well change quite a lot.

Mobile is Changing Shopping

The web has changed buying behavior. Mobile, some would argue, is about to change it again.

The first shift, to online shopping and buying, largely was centered on some physical products like software, books and CDs. At least at first, many argued, with some evidence, that other soft and hard goods could not so easily be sold that way. 

But brands like Zappos and Amazon, which now represent significant sales of hard goods and soft goods, suggest change is coming. 

To be sure, some argue that "showrooming" now is among the reasons for growing online sales of soft and hard goods, since people can "touch" the merchandise in a store, and then order online. 

The latest change is that smart phone users are starting to compare prices and availability using their mobiles, and sometimes making a purchase from an alternate supplier while still in the retail store. So mobile in-store is part of a broader behavioral change that should shift more shopping online. 

FTC Ponders Google Antitrust Move

The Federal Trade Commission appears to be nearing the filing of an antitrust case against Google, Reuters reports. Though some had speculated that such action might eventually be brought based on the way Google ranks search results, that might not be the case. You can watch testimony here.

Without any commentary on the possible merits of the FTC case, it might be worth noting how often regulators jump in to solve a problem that the market is just about to fix. The point is that less end user activity in search is happening, anyway, with other ways of finding things. 

A New Meaning for "Second Screen"

There's a new meaning to the phrase "second screen," a term that once referred to the use of an additional content consumption screen, typically in a video context. In the older notion, the theater screen was "first," the TV screen was "second" and the PC screen was third (not in any particular order of use, but simply as an illustration of how people use various screens to consumer content). 

Some began to refer to the mobile as a "fourth screen." Now, with the advent of tablets, we might arguably be up to about five different screens that routinely are used to consume content. The difference now is that the range of content is no longer confined primarily to video, and now embraces text, image and other forms of visually-oriented content. 

So the issue is what roles and business strategies are possible in an era where people use multiple screens to consume content. 

Consider Twitter or other social applications. It hasn’t always been clear what Twitter wanted to be when it grew up. Did it want to be a news network or a complement to use of other media, consumed on multiple screens. 

Twitter CEO Dick Costolo now seems to argue that Twitter's role is to be a complementary “second screen” for existing media. That means enhancing and complementing the actual content delivery function of any other screen, not becoming an actual content provider. 

That, in many ways, is how people are using their multiple screens, in any case. They have a TV on, but use their mobiles and tablets while "watching TV." Actually "watching" sometimes is a misnomer. The TV is on, but people aren't actually watching; they are mostly listening, while watching some other screen. 

Multiple screens now are used by people to consume content. But people now also use multiple screens to complement what is consumed on other screens. 

U.S. Postal Service Plans To Test Same-Day Delivery Service

The United States Postal Service plans to launch a "same-day" delivery service called "Metro Post," in one U.S. city, for a year. The potential implications for online commerce, as you might guess, are rather intriguing. 

One big difference between "online" and "place-based" retailing is how it takes for a consumer to take possession of a product that has been purchased. Increasingly, it does not always "cost less" to buy online, after considering taxes and shipping costs. Shoppers tend to "get what they want" as "selection" always is better online than at any particular retail outlet. 

But buyers also have to wait to take possession of what they have purchased. With same-day delivery, the playing field is more nearly equal, on that front. 

But much will depend on how well USPS can execute, and how it manages pricing, volume (which will be limited) and the range of partners it can attract. Also, this is just a test. 

As with many start-up ventures, scale will matter. The service will potentially be most useful if a large percentage of U.S. residents can order from a wide range of popular merchants (online or physical retailers), at prices they are willing to pay. 

The daily cut-off time for making a purchase will likely be between 2pm and 3pm and delivery should occur between 4pm and 8pm. 

Initially, the test is specifically designed for e-commerce companies and will initially focus on a single (currently undisclosed) metropolitan area. The market test  for Metro Post is scheduled to begin around November 12 and run for at least one year.

Same-day delivery is widely viewed as a feature that could greatly change the amount of merchandise volume that can move through online channels, compared to physical retail channels. 

Carrier Billing Works for App Stores, Can it Work Elsewhere?

In past decades, it has been possible for third party merchants to offer customers payments billed directly to a phone bill. The capability was necessary after 1984, in the U.S. market, since long distance services had to be billed by a third party, as the breakup of the old AT&T "Bell system" separated the "local telcos" from the "long distance" provider, originally just AT&T. 

Up to this point, such transactions have been small ($50 or less) and relatively expensive. In past years, it might have been common for a merchant using carrier billing to pay a fee of perhaps 30 percent of the transaction amount for the privilege. 

In recent years, with volume, those fees have declined to perhaps 12 percent of gross, in some cases. That is a charge substantially above the fees charged to merchants for use of Visa-branded, MasterCard-branded or other payment network cards issued by banks or brands. 

The new surge of interest in carrier billing has been driven by sales of content and virtual goods, beginning with ring tones, but now more generally important for sales of other content and virtual goods. The prevailing wisdom is that sales of virtual and content goods will likely remain the primary use for carrier billing.

But there is at least some thinking now about ways carrier billing could have application in sales at retail locations. The amount of the transaction fee remains an issue. So is the limitation on purchase amount. And while PayPal, for example, is using prepaid mechanisms to make its foray into retail payments, carrier billing does not obviously and intuitively lend itself to that approach. 

A carrier could issue prepaid cards that are refillable, then link the prepaid card to the phone bill. But then there is no obvious need for use of the carrier billing mechanism. 

The ability to use a mobile phone as a payment vehicle does present new opportunities, of course. Conceivably, a mobile could be used to "carrier bill" transit fares, bridge tolls, parking fees or other generally small transactions. The issue now is how many of those scenarios might be adaptable to carrier billing mechanisms using the mobile phone, compared to other approaches. 

Why Maps Matter to Apple

Apple's recent introduction of its own "maps" app didn't go as well as Apple, or its users, would have preferred. 

The reasons why Apple wanted to control its own app are clear enough, though. 

Most people use map apps (about 89 percent of respondents to a Yankee Group survey say they have done so). 

More important, though, are the potential advertising implications. Mobile ads associated with maps or locations are estimated to account for about 25 percent of the roughly $2.5 billion spent on mobile ads in 2012, according to Optus Research, up from 10 percent in 2010. 

That is expected to grow as the number of location-aware software apps grows. But more than ad revenue, Apple is going after the map market to have more control over a key asset in the widening smartphone war. 

Maps are related to "location," and location is the key to the value of mobile advertising and promotion. 

Google Maps is used by more than 90 percent of U.S. iPhone users. So engagement is an issue as well.