Ecosystem Conflict Heats up in Mobile Payments Business with Apple Pay Launch

One of the persistent issues for mobile payments is the complex nature of the ecosystem needed to support it, ranging from end user smartphones and willingness to use mobile payment apps; retailer and credit or debit card provider support; as well as participation by clearing networks.

With the launch of Apple Pay, we have seen a rather significant degree of retailer conflict with credit card issuers, each backing a different service.

A group of retailers (Merchant Customer Exchange) are creating their own mobile payment system, CurrentC, set to launch in 2015.

Now there are reports MCX members are disabling the near field communications function of their retail checkout systems, to prevent use of Apple Pay, now viewed as a rival system.

The big battle, though, is not between Apple and the retailer consortium, but between the retailers and the credit card and debit card issuers (banks).

Banks and credit card companies have enthusiastically supported Apple Pay, seeing it as a way to increase the number of purchases people make with their credit cards.

Conversely, Apple has struggled to get merchants to join.

On the other hand, not a single bank backs “CurrentC,” the retailer service that intends to cut out use of credit and debit cards, thus saving retailers the card processing fees.

The CurrentC app, when it launches in 2015, will not link the smarpthone apps with a user’s credit card.

Instead, it will withdraw funds directly from a CurrentC user checking account.

CurrentC also plans to support its own retailer gift cards, use of which likewise will avoid payment of the credit or debit card fees.

Gap, Old Navy, 7-Eleven, Best Buy, CVS Pharmacy, Darden Restaurants, HMSHost, Hy-Vee, Kohls, Lowes, Dunkin’ Donuts, Publix Super Markets, Shell Oil, Sunoco, Target, Walmart, Sam’s Club, Sears, Kmart, Bed, Bath & Beyond, Banana Republic, Stop & Shop and Wendy’s say they will support CurrentC.

Apple Pay, on the other hand, has signed up Bloomingdales, Macy’s, Duane Reade, McDonald’s, Sephora, Petco, Panera Bread, Staples, Nike, Walgreens, Subway and Whole Foods.

You can see the problem: the mobile market, already fragmented, is going to get more fragmented. Softcard, the AT&T, Verizon, T-Mobile US consortium and Google Pay already are in the market.

And one cannot help but think Amazon and PayPal could be key contenders as well.

Those tensions within the mobile payments ecosystem have analogies in the video entertainment and mobile communications businesses as well.

Tensions between video distributors (cable TV, satellite TV and telco TV) are not unusual, especially when contract renewals are underway.

In the mobile communications business, device suppliers such as Apple have different business interests than the service providers, while app providers have different business interests from mobile service providers and device suppliers.

That has mobile service providers and many fixed network service providers lining up against network neutrality rules, while many app providers support those rules.

Though all the arguments advanced by all the contestants claim “consumer benefit,” there is substantial business advantage at stake.

That is not to say those arguments are without merit. But there always are private interests that correspond with every public purpose.

A "No Good" Product Purchased by 79% of All Homes

It is not hard to find critics of U.S. high speed access prices and speeds, which are said to be inferior to services in many other countries. But it is a funny sort of unloved product that 80 percent of households buy.

About 79 percent of U.S. households get a fixed network broadband Internet service at home, according to Leichtman Research Group. If that seems unremarkable, consider that a decade ago, just 20 percent of U.S. homes bought high speed access service.

One comment likely is worth making: if U.S. consumers were fundamentally unhappy with high speed access, they would not buy it. Similarly, as much as people tend to complain about high cable TV prices in surveys, purchase rates are higher for linear video entertainment than for high speed access.

About 84 percent of surveyed U.S. homes buy a linear video entertainment subscription, Leichtman Research says.

That does not mean consumers are equally happy with all providers of those services, or necessarily “highly satisfied” with the services in general. But such high buy rates indicate that the vast majority of U.S. homes see high speed Internet and video entertainment as highly important services “good enough” to buy right now.

Ask a consumer if a product they presently buy could be made improved, and might cost less, and most likely will say the products could be better and could be cheaper.

But one good rule for market research is to follow the money, and watch what people do, not what they say they do, or might do.

And behavior can change, when a much-better product alternative is made available. That is true for Apple iPhones or Google Fiber.

Since broadband access now accounts for 95 percent of all households with Internet service at home, there are an additional five percent of Internet-using homes apparently purchasing dial-up access. That might represent perhaps three percent of U.S. homes.

The high speed access adoption rate is an increase from 94 percent in 2013,  89 percent in 2009, and 33 percent a decade ago.

Also, about 63 percent of surveyed adults access the Internet on a smartphone, up from 44 percent in 2012.

For the most part, people buy both mobile and fixed Internet access. Some 59 percent of respondents say they get Internet service at home and on a smartphone.

But there is a mobile Internet equivalent of fixed telephone line cord cutting. About 24 percent of all “not online at home” respondents report they access the Internet on a smartphone, up from 19 percent in 2013 and 12 percent in 2012. So the percentage of “mobile-only” Internet access users doubled over the last two years.

AT&T Essentially Disables Apple iPad Air 2 Universal SIM

In a development that illustrates the tensions within the mobile ecosystem, AT&T apparently locks the Apple universal SIM that comes with the new Apple iPad Air 2, a feature Apple embedded to make it easier for device users to switch mobile data plans without having to manually insert a new subscriber information module.

For Apple, the feature adds distinctiveness and value and makes easier the end user task of connecting to mobile Internet access networks.

For the participating mobile service providers, the capability makes new potential customer sampling and sign-up easier, but also makes leaving easier.

That tension between business interests in an ecosystem are not uncommon. Linear video entertainment providers and program networks routinely tussle over contracts, and service interruptions, as part of the bargaining process, are far from unusual.

Some also believe the strategic reason firms such as CBS and Time Warner (HBO) are launching over the top services is to create more pressure on traditional distributors including cable, satellite and telco TV providers.

In the mobile services business, some mobile service providers, in the past, have simply blocked use of over the top VoIP apps.

So the long term implications of the new universal subscriber information module in the new Apple iPad Air 2 are not clear. And what happens with the iPad Air likely is not the big question.

Many would be quick to note that the long-term implications would likely occur on the phone side of the business, not tablets.

If customers were able to switch mobile carriers “on the fly,” the amount of churn would likely increase, as the amount of competition likely also would increase, at least for some types of account plans.

Contract accounts would still remain relatively stable. But consumers on no-contract plans might be a bit more likely to consider switching at least once a month. The biggest change in behavior might come for consumers on prepaid plans.

The “connect on demand” feature likely is best used by device owners who only sometimes need mobile access, as it seems designed to offer most value for users who need temporary access to mobile connectivity.

The new SIM is essentially a “software-based” technology, eliminating the need for manually inserting a physical SIM to activate service from a particular carrier.

The new SIM sits in the same slot as a regular nano-sim and can be swapped out. That means a traveling user will be easily able to buy temporary or short-term access from a local mobile phone network without having to pre-order a new SIM or purchase one in a shop on arrival.

Neither Apple nor the tier-one service providers are dumb. Each will have thought about balancing potential gain and potential pushback.

For the moment, no matter the service provider, it still will make most sense for an iPad Air 2 owner to buy a long-term plan for mobile Internet access, if that is something routinely required.

The obvious value is when users are roaming, or need mobile access for a short time, for some reason.

Mobile service providers not only hope the ease of activation will encourage more sampling of mobile connectivity for the iPad Air 2, which could lead to a long-term subscription, but also increase sales of roaming service.

But AT&T seems to have concluded the downside is greater than the potential upside.

RiteAid "Blocks" Apple Pay, Google Wallet

RiteAid seems to have decided its backing of the Merchant Customer Exchange (MCX) mobile payment initiative conflicts with accepting either Apple Pay or Google Wallet payments.

At the moment, RiteAid does not support either Apple Pay or Google Wallet payments.

So should RiteAid be legally compelled to support Apple Pay or Google Wallet? Most likely would disagree. The implicit reasoning might entail some thinking that RiteAid is free to sell whatever products it wants, and be paid any lawful way it chooses.

Retailers, like many other businesses, make decisions all the time about what products to sell, how to sell them and how to distribute them. Manufacturers often must pay for the privilege of being featured in the best locations on retailer store shelves, for example.

Newspapers, magazines and television stations makes decisions every day about publishing or televising some stories, rather than others.

The point is that quite a lot of discretion normally is exercised by most companies selling most products, as a routine occurrence.

True functional monopolies tend to be treated differently. Most are familiar with the notion that some products are “natural monopolies.” Roads, water systems, electrical grids and wastewater systems provide examples.

But some other businesses that have in the past been seen as natural monopolies, might not be such clear cases. Railroads, cable TV networks, airports and telecom networks have at points in time been viewed as natural monopolies.

There now are greater practical questions about whether that really is the case. Some might argue the issue tends to be the possibility of functional oligopolies or monopsonies, not strictly monopolies.

Many now would argue that, although not natural monopolies, it might still be the case that only a few leading providers can prosper in some businesses with “scale” economics.

Still, the view policymakers have of these industries really does matter. A true natural monopoly might never have any competition, so regulation makes sense. Competitive markets do not require such regulation.

Somewhere in the middle are markets where scale matters, but monopoly is not a fundamental or natural characteristic.

That is why RiteAid deciding which payment methods to accept does not require regulation. Some might argue sewers, highways, electricity or water systems are natural monopolies, and do need regulation.

Video entertainment services, linear or over the top, are not monopolies, and require no regulation of content, anymore than RiteAid must be required to accept all known forms of payment.

But there is a popular notion that Internet access, which is not a natural monopoly, requires regulation of the sort typical of such industries, namely “common carrier” rules that might prescribe what products can be sold, how they might be packaged and what they might legally cost.

Public policy choices have consequences. And one consequence of regulating industries that are not natural monopolies, as though they were, will tend to depress investment and suppress innovation.

Some might not care. One can always point to instances, in any area of commerce,  where material interests among ecosystem participants conflict, and where an economic or financial loss by one part of the value chain results in material benefit for other parts of the value chain.

For buyers, higher prices are a burden; for sellers a benefit. Retail product costs for consumers also represent the basis for wages for workers in the selling industries and firms.

So long as markets operate, such tensions within any product ecosystem can adjust, over time. What arguably does not work so well are imposed rules that actually prevent such adjustments, which is what common carrier regulation tends to do.

To oversimplify a complex matter, RiteAid should not be forced to accept Apple Pay or Google Wallet.

Neither, for similar reasons, should RiteAid be told what lawful products it can sell, or how much it can charge for those products, or where those products can be displayed.

Every other competitive industry and firm likewise should be allowed to craft its offers as it deems the market prefers. That might, in some industries, involve accepting advertising, product placement fees or other support that defrays end user cost.

That is why “sponsored data” or “free apps” that people can use without incurring charges or usage are significant. The extend access to desired apps and services, and save consumers money, while still creating a revenue model for the sponsoring entities.

Common carrier regulation is a hammer for which every problem is a nail.

EC Officials Now Telecom Policy Must Take Service Provider Profit into Account

In theory, it is possible to create regulatory frameworks that simultaneously promote both competition and expedited investment in next generation networks. In practice, almost any set of policies will be criticized, and often sharply, by some contestants whose business interests the framework does not help.

One recent difference in thinking is noteworthy. U.S. regulators, working to implement the Telecommunications Act of 1996, which intended to promote competition in the U.S. telecom market, initially crafted a set of rules very similar to European Community rules, namely widespread and mandatory wholesale access, at steep discounts.

Though it never is formally said, the test of any new “pro-competition” policy in a legacy telecom market is to cause former incumbent market share to fall. If you think about key performance indicators, that is the key KPI.

A policy “works” when the incumbent loses substantial market share.

But there was a key difference between the U.S. set of facts on the ground and the equivalent EC set of facts. In most EC nations, there was but one facilities-based dominant supplier.

In the U.S. market, there were two broadband providers--the telco and the cable TV operator. Eventually, to spur faster investment, not just competition, U.S. regulators decided to rely on facilities-based competition, not mandatory wholesale access, especially for new optical fiber facilities.

Non-facilities-based competitors were not happy about the change, as the switch in policy favored the cable TV companies, who had facilities in place.

But some would say the switch to an emphasis on “facilities-based competition” has succeeded, as per-capita investment in U.S. access networks has been substantially higher than in the EC region; about twice as high, by some estimates.

It now appears that a decisive change in thinking has happened. EC authorities are worried about lagging investment in next generation networks, and are prepared to take steps to promote investment, not just competition.

The other change is that cable TV operators have begun to create a new facilities-based competitor to the former telco incumbents in many EC nations, creating a feasible foundation for facilities-based competition.

The larger point is that policies matter. Both competition and investment in next generation networks are important. EC regulators now are thinking about how to promote investment, not just promote competition.

That remains a valid framework in the U.S. market as well. In principle, policymakers are right to think about policies that encourage innovation and investment in Internet-delivered apps and services.

But a primary charge for U.S. telecom policy officials is precisely what EC officials now see as important: promoting robust investment and sustainable competition for Internet and other access services.

At some point, policies will have to be evaluated not only for their pro-competition impact, but also from the impact on sustainable and high rates of investment in core access networks. As the EC experience illustrates, one cannot indefinitely favor “competition” without at some point being faced with the challenge of negative incentives to invest.

If you have followed European telecommunications market for any time, you might well agree that a major shift in regulatory thinking has happened in the European Community, which for decades has been more concerned about promoting competition than promoting investment in next generation networks.

Specifically, regulators have encouraged affordable wholesale access to the former-monopoly telecom networks, in a variety of ways. It is hard to argue with the results.

Incumbent market share across the EU-27 in 2010 was 38 percent. In other words, competitors had gained 62 percent share of the fixed network market.

But that degree of competition has come at a price. The EU is in danger of failing to make its announced goal of 30 Mbps by 2020, a target that originally was set before the launch of Google Fiber, which has changed market dynamics and investment in the U.S. market, for example.

So regulators should ease up on IT and telecommunications companies to allow them to compete with rivals around the world, said Guenther Oettinger, new European Union digital economy commissioner.

"So far, we have ensured that consumers benefit from the liberalization of telecoms markets,” Oettinger said.  From now on our actions must be more geared more toward allowing companies to make fair profits."

That represents a huge change in thinking. The main point is not that the EU has decided to take a “North American” or “U.S.” approach. Instead, the big shift is the recognition that promoting competition and promoting investment can become rivalrous and mutually-exclusive goals.

The way competition is promoted can lead to greater investment, or less investment. As the former incumbents have argued for years, mandating wholesale access at rates favorable to wholesale customers--while effectively promoting competition--has created disincentives for investment in upgraded next generation networks.

Though the financial cost and risk is borne by the firm building the networks, wholesale customers can reap the advantages without any capital investment in the core network, at all, though they might face the requirement, or have the option, of investing in some access network elements.

The shift to thinking about policies to incentivize investment in access networks is a huge shift in thinking.

Starbucks Customers Use Mobile Payments 4 Orders of Magnitude More Often

In 2014, possibly $1.6 billion worth of in-store U.S. retailer purchases will be handled by mobile payments, eMarketer estimates.

At Starbucks, mobile payments account for about 15 percent of purchases. If Starbucks processed at least five million transactions a week early in 2014, some estimate that Starbucks could have processed $1 billion in transactions by the end of 2014.

If so, Starbucks might well represent 63 percent of all in-store mobile payments. That might seem high. It might be.

Everything depends on the assumptions one makes about the volume of 2014 proximity payments in the U.S. market.

Some estimate U.S. mobile payments transaction volume as high as $162 billion in 2014. Others estimate U.S. mobile payments using proximity at less than $4 billion in 2014.

If the former is correct, Starbucks mobile payments represent only a bit more than half of one percent of U.S. retail transactions. That strikes us as too low.

At the latter figure for total U.S. proximity transactions, Starbucks represents about 27 percent of all transactions, which to some might seem more a reflection of reality, if still possibly high.

Still, everything hinges on one’s estimates of total proximity payments, which Javelin Strategy has estimated at less than $1 billion in 2014.

About the only safe statement is that Starbucks customers use mobile payment at rates four orders of magnitude greater than all retail in-store retail customers.

Will Mobile Operators Lose $14 Billion in 2014 Revenue to OTT?

source: TeleGeography

Mobile service providers will lose some $14 billion in revenue to over the top alternatives in 2014, according to Juniper Research. about 26 percent more lost revenue than in 2013, Juniper Research says.

To be sure, such estimates are complicated, as researchers have to model revenue volumes “as if” competitive or replacement solutions did not exist, compare those hypothetical amounts to actual revenues and then estimate the amount of potential revenue lost because consumers have shifted to alternatives.

The report suggests that in a number of markets, including Italy, Spain and the United Kingdom, operator mobile voice revenues had fallen to less than 60 percent of their value five years ago.

Juniper Research argues that a combination of instant messaging, VoIP and social media substitution was primarily responsible.

The report identifies more than $66 billion in revenue opportunities over the next 5 years, highlighting opportunities in areas such as M2M (machine-to-machine), mobile money, direct carrier billing and ‘Big Data’ analytics.

The resulting revenues could more than offset the decline from core service revenues on an annual basis by 2018.

http://www.juniperresearch.com/research/Mobile-Operator-Business-Models

The analysis is similar to the challenge of estimating how much voice usage has been displaced by email and text messaging, social posts or use of free or low-cost VoIP.

It is not unreasonable to assume this has happened, as it is not unreasonable to assume that email and document scanning have displaced facsimile transmission.

But some are skeptical of the “lost revenue” claims, at least in degree. Portio Research, for example, has questioned the actual amount of lost revenue.

While in some markets over the top messaging presumably does cannibalize significant text messaging revenue, in other markets, where mobile Internet access is not widespread, dramatic growth of mobile adoption means more text messaging revenue is being created.

Juniper Research analysts would not disagree, in that sense.

“During 2012 and 2013 we have seen many reports that operators are losing $20 billion to $30 billion in SMS revenue to OTT messaging apps,” said Karl Whitfield, a director at Portio Research. “We see reports that OTT traffic will be double that of SMS by the end of 2013,” he says. “This is wrong on both counts.”

It may be true that SMS revenues are levelling off and that OTT is on the rise, but SMS is still generating revenues of $15.3 million per hour, 24/7, that’s a massive $133.8 billion in 2013, Whitfield says.

Over the top apps generate about $3 million an hour, by way of comparison.

So even if all OTT messaging displaces text messaging--and that almost certainly is not completely the case--the lost revenue might be estimated as somewhere between $3 million per hour (OTT revenues) and a figure higher than $3 million per hour that represents the lost revenue that otherwise would have used the SMS format.

The analogy is the lost revenue from Skype. Much of the Skype usage is incremental, and would not have happened, were public network calling, messaging and video conferencing the only alternative.

Skype, in other words, creates new usage, rather than cannibalizing traditional forms of communication, much of the time.

Still, one way of estimating the impact is to compare actual revenues with former trendlines. as TeleGeography has done, comparing annual growth of international minutes of use, by adding Skype volume and carrier traffic volume, for example.

Global OTT and P2P Messaging Traffic (Billions)

	2010	2011	2012	2013F	2014F	2015F	2016F	2017F
P2P SMS	5,812	6,546	6,623	6,687	6,654	6,522	6,304	5,931
OTT Messaging	1,494	3,840	6,774	10,452	14,970	20,437	26,359	32,141

source: Portio Research