PayPal Acquires Paydiant in Bid for Bigger Role in Retail Mobile Payments

PayPal is acquiring Paydiant, a provider of a white-label platform that allows retailers to create their own mobile wallet apps, including payment, loyalty card, and digital coupon support.

The move shows PayPal’s commitment to acquire a bigger role in retail payments, since Paydiant's customer base includes Subway, CapitalOne and MCX, the consortium of major retailers that plans to launch a mobile payments platform called CurrentC later in 3025.

MCX's backers include Wal-Mart, Target, Kmart, Best Buy, Dunkin' Donuts, CVS, Shell Oil (for its network of convenience stores and gasoline stations), 7-Eleven Inc. and Sunoco.

With the Apple Pay launch, Samsung's acquisition of mobile payments platform LoopPay, and Google's deals with U.S. carriers to pre-install Google Wallet on their Android phones, it is clear that activity in the mobile payments space is heating up, even if the leading contenders now seem to include the retailers, Apple, Samsung, possibly Starbucks and potentially Google, even if the leading mobile service provider (SoftCard) essentially has withdrawn from active contention.

Network Neutrality Misconceptions

Of the many “myths” about net neutrality, perhaps five most are most widespread, according to Brent Skorup, Mercatus Center research fellow.

They are:

• The Internet is, and has been, neutral
• Net neutrality is the only way to promote the open Internet
• Neutrality promotes access competition
• Packet prioritization harms end users
• Neutrality rules will lead to lower prices, better video experience

Packet prioritization has been built into Internet protocols for years, says Skorup. One might point to widespread use of content delivery networks as one example. Peering and transit are different interconnection models that are not “equal.”

Use of the public Internet for voice, conferencing and video entertainment makes the need greater, as those apps are intolerant of packet delay. Telemedicine and other industrial and commercial apps coming as part of the Internet of Things likewise will require more quality of service than the “best effort” Internet is likely to provide on a consistent basis.

Nor are neutrality rules the only way to promote the open Internet. The FCC already had committed to openness principles assuring consumers access to all lawful applications, for example. On the two or three discrete instances where an ISP had tried to block lawful apps, the FCC acted quickly to discipline the offenders.

Every ISP now knows they cannot block a lawful app. And where it comes to consumer protection, the Federal Trade Commission and Department of Justice all have authority to take action, as well.

Whether neutrality rules enhance competition is hard to assess. The rules apply to all consumer Internet access--mobile and fixed--so no provider has an advantage, or can get an advantage.

Neutrality rules arguably reduce or limit ISP profit margins and products, and might therefore make the industry less attractive to new entrants.

Nor is “packet prioritization” automatically harmful to retail end users. Though as a slogan “treating every bit equally” sounds great, different apps have different exposure to packet latency. That is the principle behind content delivery networks that reduce packet latency and jitter.

That is why email and most web browsing works just fine with best effort access, but video conferencing, voice sessions or video can be unpleasant, when networks are congested.

Some possibly related concepts, such as zero rating some apps, also have value for end users.

Zero rating is a way to allow consumers--especially consumers in the developing world--a way to use and sample Internet apps when they cannot afford a mobile data subscription.

Some might argue that network neutrality will make end user services cheaper, in part because the rules will prevent some possible costs for app providers. But net neutrality--and the coming litigation over it--will add costs for ISPs that certainly will be recovered from end users, one way or the other.

Neutrality rules do not directly allow video entertainment services to operate more pleasantly (lower latency) or load faster. In fact, packet prioritization does those things. In a best effort scenario, congestion will degrade performance for all apps, but especially video, voice and conferencing.

The argument that investing in more capacity solves all problems is not completely correct. But the incentive to invest more arguably is reduced by new neutrality rules.

So what parts of the Internet ecosystem are helped by neutrality rules? Only some app providers who now are creating the biggest traffic demand on any consumer ISP network, namely suppliers of streaming video.

In that sense, the broader “television content” segment of the industry wins, as it is protected from the cost of any content delivery network capabilities that reach all the way to consumer homes, and which might be necessary as a competitive investment if one or more leading competitors were to opt for such prioritization.

As always with any regulatory action, there are economic winners and losers. Network neutrality is no different in that regard.

Law of Unintended Consequences Now Will Play Out in Internet Access

“Managed services,” or “specialized services” now might emerge as a key development for service providers, should network neutrality rules become more popular, or survive legal challenge. The reason is that such services are exempted from the rules.

Oddly enough, the argument that network neutrality is needed so the “Internet doesn’t become cable TV” will have the perhaps-unintended consequence of increasing the value of such managed services for Internet service providers.

In other words, it is likely a rational Internet service provider, with the requisite scale, can make higher profit margins on a managed service than from commodity high speed access.

It therefore makes sense that rational actors will shift effort towards managed services.

Consider that, from 2010 to 2013, U.S. mobile data pricing (per unit sold) declined by only single digits year over year. In the first nine months of 2014, data pricing dropped by 77 percent, according to industry analyst Chetan Sharma.

Whatever profit margins might once have been, one can argue those margins are dropping, even if suppliers are selling more units.

Average (mean) mobile data consumption increasedto about 2 Gb a month in 2014. That single-year increase is unusual.  Sharma notes it took 20 years for consumption to reach 1 Gb per month usage levels.

In addition to plunging prices (less revenue per unit sold) and higher usage (more network cost), marketing costs have grown as competition has become more intense.

Overall U.S. operating expense rose 20 percent, year over year. Income was flat while earnings grew three percent.

That is likely to convince larger ISPs to create new products where bandwidth is simply an enabler of a service, and not the actual product sold to an end user. Linear video services and carrier voice services or text messaging require bandwidth and network services, but the product purchased by the customer is not “bandwidth.”

Net Neutrality Irony and Unintended Consequences

Ironically, March 1 to 7, 2015 is “National Consumer Protection Week” in the United States, a time when the Federal Trade Commission and 89 partners including nonprofit groups, businesses, and federal, state and local government agencies across the country will spotlight their efforts to protect consumers.

The irony comes because new Federal Communication Commission rules on network neutrality, regulating Internet access as a common carrier service will have the effect of ending the FTC’s ability to apply consumer protection rules to Internet access services.

“We do not have authority over common carriers,” said FTC Commissioner Maureen Ohlhausen. “There are significant issues about our ability to protect consumers under Title II.”

In the past, “to the extent network neutrality is an issue, the FTC has been able to address them,” said Ohlhausen. “We are consumer protection enforcers; we can do that.”

The FTC recently took action against a mobile service provider advertising “unlimited access” that actually throttled users of the plan, after a certain threshold of usage was reached, for example.

Under Title II, the FTC is barred from acting, however.

That is likely only the first “unintended consequence” that will surface once the 332-page document is formally released. The FCC has argued the new rules will not lead to rate regulation.  

FCC Commissioner Ajit Pai does not agree. “For the first time, the FCC will regulate the rates that Internet service providers may charge and will set a price of zero for certain commercial agreements.”

Of course, much hinges on whether the new rule survives legal challenge, and whether Congress acts to restore a Title I framework.

Unintended consequences are highly likely.

U.S. ISP Profit Squueze Now is Likely

The decision on Feb. 26, 2015 by the Federal Communications Commission to preempt state laws prohibiting municipal broadband networks is but one example of growing competition in the U.S. high speed access market that arguably already was getting more competitive, thanks largely to Google Fiber.

Consumers will benefit, at least in the near term, as the actual presence of a third provider in a growing range of local markets both increases speeds and lowers prices.

Consider what Sonic.net is doing. It now is selling gigabit connections, with voice service, for $40 a month, submarining even Google Fiber pricing of $70 a month for gigabit high speed access.

Cumulatively, all the coming new competition, plus declines in mobile high speed access, are going to mean service providers must reduce their operating costs.

From 2010 to 2013, U.S. mobile data pricing (per unit sold) declined by only single digits year over year.

But in the first nine months of 2014, data pricing dropped by 77 percent, according to industry analyst Chetan Sharma.

At the same time, average (mean) mobile data consumption increased to about 2 gigabytes (Gb) a month. Sharma notes it took 20 years for consumption to reach 1 Gb per month usage levels.

The increase to 2 Gb took about a year.

In addition to plunging prices (less revenue per unit sold) and higher usage (more network cost), marketing costs have grown as competition has become more intense.

Overall U.S. operating expense rose 20 percent, year over year. Income was flat while earnings grew three percent.

Like it or not, more competition in Internet access is coming. Profits are going to get squeezed.

Will Customers Pay for Two High Speed Networks--on Different Platforms--to Support Dual Routers?

If you have lemons, make lemonade, an old adage suggests.

For a high speed access provider with access to both cable TV hybrid fiber coax and wholesale fiber-to-home access, that might mean trying to add value to an offer by bundling access to both networks as part of a single high speed access subscription.

It’s unusual, but few service provider anywhere in the world have such access as does StarHub in Singapore.

So Starhub now is testing the notion that having two high speed connections, supplied by different networks, has value for Wi-Fi coverage, and therefore makes the Starhub “two connections” offer distinct in the Singapore high speed access market.

Essentially, StarHub is trying to wring more value out of a legacy HFC access network, now that it also has wholesale access to the fiber-to-home network in Singapore. Bandwidth really isn’t the angle.

It easily can be argued that there is actually little advantage gained  when a StarHub subscriber buys a S$69 per month gigabit access service sourced by the Next Generation Network Broadband Network used by all high speed access providers in Singapore, and then also gets, at no extra charge, a 100 Mbps connection to the StarHub HFC network.

Competitors offer the gigabit connection for S$49 a month.

In truth, few, if any applications actually use much of a gigabit connection, so adding another 100 Mbps might provide little if any value, in terms of the access connection’s bandwidth. And the additional cost will be a barrier.

But StarHub already has built the HFC network, and now it essentially is a stranded asset. So StarHub might as well try and figure out a way to wring some value out of the legacy asset.

In what might otherwise be an obvious case of overkill (over-provisioning or over-investment), StarHub argues the value is multiple Wi-Fi base stations, to improve indoor coverage.

It remains to be seen whether that “advantage” actually resonates with customers. But it is an unusual offer.

To be sure, StarHub sells linear video entertainment, so the HFC network investment is not fully stranded. But the NBNBN also now means StarHub has to offer gigabit services over the Singapore wholesale network, to remain competitive in the high speed access business.

That means the financial return from the HFC network will be driven primarily by sale of voice and linear video services, not a triple play bundle including high speed access. But that’s where the new “dual-network” approach comes in.

Over the long term, it isn’t so clear that it makes sense to maintain the HFC network. In the meantime, StarHub will try to earn a potential S$20 a month in incremental revenue by supplying a “two Wi-Fi routers” approach.

When you have lemons, make lemonade. Then, can you sell enough of it to make the effort worthwhile?

Net Neutrality Rules Will Pass Today

The unknowns are the precise details, and even those won't be available for a few weeks. The rules would not take effect until 30 days after publication. 

Then there will be a short stay of the rules, as lawsuits are filed. Then, in all likelihood, the rules will take effect until the lawsuits are heard and decided. 

How much uncertainty will be created in the U.S. telecommunications business is an issue.