"Nobody Rides for Free: Issue in Mobile Payments and Telecom

MasterCard recently has instituted a new fee structure for “staged” digital wallet providers such as Google Wallet, PayPal and Square, In practical terms, it means the cost of doing business, for those digital wallets, is higher than it used to be, when using MasterCard bank-issued cards are invoked by wallet users.

The point is that although the mobile commerce ecosystem now is a battleground on many fronts, upstart disruption agents now have to confront incumbent resistance. 

The process is reminiscent of what happened when U.S. local telecommunications stopped being a monopoly after 1996. There was an explosion of new competition. Regulatory rules favored the attackers, up to a point. 

But incumbents counterattacked, with prices charged for use of their networks being one element of the resistance. 

Chris A. McWilton, MasterCard’s U.S. Markets president, said PayPal “rides for free"  on the back of other business models." Does that sound familiar? 

Back in 2006, then AT&T CEO, Ed Whitacre complained that “some people” want AT&T to act as a “dumb pipe that just keeps getting bigger and bigger.”

“If you build it, you have to make a return on that,” Whitacre said.  “Nobody gets a free ride , that’s all.”

It's the same language, and with similar justifications. Of course, there are differences. Business partners cannot use the MasterCard network or the public switched telephone network without paying the network owners. Both of those networks are "closed."

The actual problem AT&T was complaining about was use of the Internet access service. There's a key difference, or at least an important nuance. Use of the global voice network is a fee for service, as is use of MasterCard's clearing and settlements network.

Though users pay a fee to get access to the Internet from an ISP, they do not pay for use of the Internet.

Still, you get the point. Incumbents faced with disruptive challenges to their business model will eventually use all the powers of incumbency, when they can, to fight back. Veterans of the U.S. competitive local exchange carrier business will recall just how effective incumbents can be. 

Despite the familiar refrain that "the present year" is the year of mobile wallet or mobile commerce or mobile payments disruption, we are a long ways from knowing how the full story will play out. 

If Google Can Do Google Fiber, Can Telcos and Cable Companies?

AT&T says it is prepared to build an advanced fiber optic infrastructure in Austin, Texas, capable of delivering speeds up to 1 gigabit per second, provided it gets the same terms and conditions as did Google Fiber. That’s interesting.

Some of us have been skeptical that Google Fiber would be able to build its 1-Gbps fiber to home network at costs markedly different from what a telco might expect to be able to do, in the same markets.

But always also has meant that if a telco really wanted to do so, it could build a 1-Gbps access network, today, particularly if “spot upgrades” in the way Google Fiber builds, prequalifying neighborhoods by requiring a certain percentage of households to indicate they will buy.

To be sure, there are overhead and other operating cost issues. But AT&T’s indication of interest also shows that, when push comes to shove, AT&T will respond to new competition in its markets.

Google Fiber buys from the same suppliers and uses the same construction contractors ad a telco would do.

Some might argue that inducements provided by Kansas City, Kan., Kansas City, Mo. or Austin, Texas can materially affect network cost. Some have doubted that, all along.

Google should have lower overhead, and perhaps lower operating and marketing costs based on the way it is prequalifying construction. But nothing of that sort should be meaningful enough for Google Fiber to magically undercut current telco FTTH pricing.

Instead, the issue is the business model, in particular the ability to make money selling 1-Gbps Internet access for $70 a month, while giving away free 5-Mbps service, and selling a video entertainment-plus-broadband package for $120 a month.

AT&T says it will build a 1-Gbps network in Austin if is gets the same geographic scope of offerings, rights of way, permitting, state licenses and any investment incentives Google Fiber has gotten.

Google insists the deal it has with Austin is non-exclusive, and involves no economic incentives, so it is possible AT&T could get such permission.

AT&T also says doing so in Austin would not materially affect its announced 2013 capital investment plans. How could that work? Assume AT&T already has allocated capital for Austin network upgrade purposes in 2013.

AT&T might do what Google does, polling neighborhoods and setting minimum thresholds for take rates before agreeing to build. So, in principle, AT&T could do its own polls, find out where a critical mass of potential customers exists, and then spot build in those neighborhoods, just as Google will do.

So far, there isn’t too much evidence that Google has been able to make a dramatic breakthrough in terms of basic infrastructure cost, one might conclude from an analysis of Google Fiber costs in Kansas City, Kan. and Kansas City, Mo.

That doesn’t mean Google Fiber has “failed.” AT&T’s offer suggests Google Fiber already has won.

Already, Google Fiber might be showing that it is possible to build 1-Gbps fixed networks at costs roughly comparable to what others are spending to create slower-speed networks.

Bernstein analysts Carlos Kirjner and Ram Parameswaran estimate that it costs Google $464 to connect a Google Fiber “broadband access only” service, and $794 to connect a customer buying broadband and video service.

That first wave, of 12,000 homes on “day one” of the service equates to an eight percent penetration rate, and implies a cost of $10 million for Google, further implying a total cost of $94 million for the Kansas City project. That includes about $42 million for the Kansas portion and $52 million for the Missouri.portion.

But those are the “activate a customer” costs, and do not include the cost of the actual backbone network.

Kirjner and Parameswaran say it will cost $84 million to pass (but not actually connect) 149,000 homes. Some $38 million will go into Kansas City, Kan., and $46 million into Kansas City, Mo., with the cost per home, for the network, costing  $674 in Kansas and $500 in Missouri.

The actual cost “per customer” then hinges on assumptions about take rate. If a third of homes passed actually buy service, then the full cost of the network is apportioned against 33 percent of passings. At that level of adoption, the network alone will cost about $1500 to $2000 per customer.

That is quite consistent with what other service providers could reasonably expect. You might also argue that $120 revenue per household likewise is within general norms for the fixed network business.

Bernstein says “the incremental cash investment to grow to 18 percent penetration in the first year will be of approximately $2 million, with $15 million in incremental cash costs offset by $13 million of contribution from users.”

Bernstein estimates that double-play customers will bring in $64 a month and broadband-only customers will bring in $47 a month.

Kirjner and Parameswaran estimate that a wider rollout around Kansas City for 300,000 homes would more than double build-out costs to $170 million (before acquiring customers and connecting those homes).

The point is that Google Fiber might be succeeding, at least for the moment in Austin, in prodding AT& to upgrade to 1-Gbps.

AT&T Says it Will Build 1-Gbps in Austin

AT&T says it is prepared to build an advanced fiber optic infrastructure in Austin, Texas, capable of delivering speeds up to 1 gigabit per second, provided it gets the same terms and conditions as did Google Fiber.

AT&T says it means by that the same geographic scope of offerings, rights of way, permitting, state licenses and any investment incentives Google Fiber has gotten. 

What is not so clear is whether Austin is willing to do so, given AT&T's different regulatory status, existing cable TV franchise and so forth. But Google insists the deal it has with Austin is non-exclusive, and involves no economic incentives. 

Intriguingly, AT&T says doing so in Austin would not materially affect its announced 2013 capital investment plans. 

AT&T might do what Google does, polling neighborhoods and setting minimum thresholds for take rates before agreeing to build. So, in principle, AT&T could do its own polls, find out where a critical mass of potential customers exists, and then spot build in those neighborhoods, just as Google will do. 

Austin, Texas is a Google Fiber City

Austin, Texas is becoming a Google Fiber city, the Google Fiber Blog finally says.

Google Fiber for Austin, Texas: One More Premature Press Release

We will know with absolute certainty today, April 9, 2012, that Google Fiber is officially coming to Austin, Texas.

But there has been another premature leak, as Gig.U first posted a congratulatory message, then pulled it back down.

"Today, Google announced it will add Austin, Texas to the Google Fiber project, joining Kansas City, Kansas and Missouri as American communities that have the power to bring next generation networks home," the  Gig.U press release said.

WhatsApp Says "No Acquisition Talks" with Google

WhatsApp says it is not in talks with Google about a purchase by Google, after reports indicated that might happen. Of course, as always is the case, discussions could have ended because the two sides could not agree on a valuation. Facebook might step in, or Google could reassess its offer, reigniting discussions.

Some say the recent denial by Verizon Communications that it was in talks to buy all of Vodafone was an example of such an occurrence. Verizon really had been offering to buy all of Vodafone, with partner AT&T poised to take the balance of Vodafone’s assets aside from the Vodafone Verizon Wireless stake. But according to one line of thinking, Vodafone rejected the offer.

Stickiness and engagement would be the primary value, not the revenue. The reason is that if mobile data revenue is about $300 billion annually, global text messaging is about half of that amount, then the legacy revenue stream is about $150 billion annually.

If WhatsApp earns $1 a year from each non-Apple users, and an annual fee of $1 from others, with about 100 million users in total, and if you assume half the users are on iOS devices, then you might estimate 50 million users paying $1 a year, as recurring revenue. That would imply something like a price-earnings ratio of 20, an “Internet multiple.”

The point is that WhatsApp has value not so much as a revenue generator, but as an app with high stickiness, as most communication apps have proven is the case. WhatsApp and other over the top messaging apps stand to destroy much of the $150 billion in global text messaging revenue, not so much to  take market share.

Telecom Italia Mulls Merger

Telecom Italia SpA, Italy’s biggest phone company, said it’s examining a possible merger with Hutchison Whampoa's H3G unit, a combination that would eliminate a competitor offering the cheapest wireless services in the country.

H3G, which uses the "3" brand, is the smallest of Italy’s four facilities-based carriers, with 9.5 million customers. 

“As we have been predicting for some time, the European telecommunications market is set to enter a period of consolidation," says Yankee Group VP of Research Declan Lonergan.

Most of the existing players are under considerable financial pressure financial pressure. Many of the largest operators are carrying large levels of debt. So don't look for Telecom Italia to borrow money to finance the transaction. 

European mobile operators are also seeing their revenues decline due to the combination of difficult economic circumstances, regulatory measures and cannibalization of traditional voice and messaging services by IP-based apps, Lonergan notes.

The issue is whether Italian communications regulators will allow the market to shrink from four national providers to just three.