The Verizon Wireless “Convenience Fee” and the End of Capitalism as We Know It

January 1, 2012 § 9 Comments

The concept first hit my radar when the “profit challenged” airlines decided to offset their personnel costs by imposing baggage fees, charging up to $50 to stow and deliver them.  Travelers complained, and the media had a field day – how dare they charge us!  Airlines held their ground (with the exception of Southwest, which never initiated the fees), and after the latest wave of bankruptcies, the charges have contributed to the restoration of industry profitability.  Then several banks (particularly the large, publically traded ones) announced that, in response to new regulations that restrict the profit they can make on electronic transactions, they would levy new monthly fees on debit cards.  Never mind that customers always had the option to do their banking elsewhere, including many community banks and credit unions.  The well-intentioned media and special interests came to the consumers’ aid once again, and rather than continue to face the negative publicity onslaught, most, if not all of the banks, relented.  No profit for you!

And now this.  Three days ago, Verizon Wireless (VZW) disclosed that customers who chose several bill payment methods (including phone and Internet) would be assessed a $2 “convenience fee” per transaction.  Customers who chose alternative channels (such as snail mail or online bank bill pay), or who signed up for VZW’s auto-pay feature, would avoid the fee.  But within hours, the media and special interests arrived on the scene again; this time joined by the FCC, which threatened an investigation.  And like the banks, VZW relented within hours.  What if VZW had simply discontinued its higher cost payment options – would it have faced the same ire?

So what’s the message here?  Are companies supposed to feel ashamed or immoral for making a profit, or for increasing them, by charging a fare rate for the services they provide?  In a competitive, capitalist market, is it not necessary to continuously innovate and to seek new ways to improve the amount and quality of the services they provide, and as these enhancements contribute their cost basis, are they not entitled to pass along these costs to their customers who are willing to pay?  After all, these are for-profit enterprises, aren’t they?  And — rhetorical question alert — don’t customers always have alternatives to paying these fees, including:

  • Comply with the conditions for “free” (such as with VZW’s free bill payment options)
  • Switch to a different provider
  • Stop using the service

What, suddenly it’s our right as citizens to have wireless service, and even more so, wireless service without extra service fees?  Since when is profitability such a problem?  For those who cling to the “greater good” argument, how would they respond to VZW’s (and all companies’) lesser ability to hire new workers without continuous profit growth?  I’m sure my assumptions are flawed, but for simply math, let’s assume 20% of VZW’s 100M customers use one of the implicated bill payment channels, and that VZW makes as much operating profit on the “convenience” fee as Verizon does overall.  On that basis, VZW could afford to hire an incremental 1,800 employees earning the median U.S. household salary, on a fully loaded basis.  If these employees helped create more growth for the company, VZW could hire even more.

Don’t get me wrong – I have no problem with consumers in a competitive, free market taking their business elsewhere, or in the case of Verizon, avoiding fees all together by complying with any of the company’s free options.  But when advocacy groups, the media, and regulators pile on together, and create the impression that the company has attempted some moral misdeed, well, that’s where I draw the line.  Come to think of it, I’m not even clear to what extent the customers themselves were even bothered by VZW’s fee — with all the noise coming from other, more organized groups, we never even got the chance to hear from them directly (other than a certain number of Tweets from some of the more vocal among them).  With only hours between the announcement and reversal of the fee, I’m not convinced the average VZW customer even had a chance to learn about it, let alone to consider how they felt about it!

Look, I know my rant may be unpopular.  I’m all for consumers making their preferences known, and even better, taking action with their wallets.  In a competitive market, this works especially well, and we have several layers of government and special interests to ensure competitiveness.  But when a business in a competitive market is vilified for imposing fees, especially when it gives customers a free alternative, I just don’t get it.  Healthy, growing businesses hire people, give raises, and pay taxes.  Isn’t that important too?

Taken to the extreme, I can see this slippery slope gaining momentum, and before you know it, our economic machine could edge its way closer to the European model, with heavier regulation and less commercial fluidity.  Even if this doesn’t occur through formal methods, it could happen through PR pressure applied by special interests or individuals in high places with “an axe to grind”.  But with many Euro Zone economies presently at risk of default, it’s hard to make the argument that their model is more desirable.  I’m happy sticking with good ol’ fashioned, American capitalism, if you please.

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Beyond the politicking, the 30% “Apple Tax” is good for subscription publishers

February 16, 2011 § 4 Comments

In a story picked up by the Wall Street Journal and many other media outlets today, Apple clarified the new ground rules that publishers who wish to offer subscription services through its iTunes interface must abide by.  Starting this summer, publishers who promote subscription services via link-outs from their iPhone or iPad apps will be required to integrate the sign-up within the app itself, using Apple’s new payment platform.  Apple will levy a 30% fee for each sign-up.  Other details include:

  • Companies can continue to sell through their own Sites, but must then offer the same service and pricing within the Apple application
  • Companies can continue to link to their own subscription registration pages from the app, but must then offer the in-app registration option as well
  • Apple won’t automatically forward new customer name and email information to the publisher; the customer must opt-in for this to occur.  Apple claims this is to protect customer privacy
  • Compliance is expected no later than June 30

Predictably, the initial reaction from publishers is that the sky has fallen.  One publisher, representing the sentiment of many, I’m sure, was quoted as saying that the Apple Tax is “economically untenable” with its business model.  Another has said that the customer data opt-in provision gets in the way of its ability to forge a relationship with its users.  But let’s look at this issue from a different perspective.

As Apple is acting as a performance based channel (publishers pay no fees for listing their apps in the iTunes Store), the “tax”, as it’s been called, is no different from an affiliate commission.  Sales affiliates routinely command fees of 30% or more.   I’ve seen as high as 70%.  With benchmarks like these, 30% seems rather fair.  Until now, publishers have been getting a free ride.

Another important factor is customer lifetime value (CLV).  Any company publishing content worth its weight in salt is going to (1) be able to charge a premium relative to its cost to produce, and (2) retain the subscriber beyond the initial subscription period.  Its fully-loaded monthly margin, multiplied by its average subscriber months, is its CLV, which is offset by its initial Customer Acquisition Cost (CAC).  Assuming the Apple charge is one-time only, many publishers will more than recover the fee over the lifetime of the subscriber.  And let’s not forget that had it not been for Apple, the publisher would have incurred a CAC through its other channels.  And the cost to acquire a new sub – we’re talking about for paid services now – is typically non-trivial.  If your service commands a $100 annual subscription price, resulting in a $30 fee to Apple, you’re probably pretty happy.  Many publishers invest $100 or more to acquire a new sub.

I also expect that savvy publishers will identify ways to circumvent the system.  Apple seems to be saying that pricing (and let’s assume special offers as well) inside the app must mirror those available on linked pages outside the app.  But what about pricing and offers on marketing pages that aren’t linked to the app?  If the rules don’t apply there, publishers will be able to craft strategies that make it advantageous for customers to register outside the app, then download the app only for consumption purposes.  If, on the other hand, Apple has already closed this loophole, the fair-payment-for-services-performed and CLV arguments still apply.

Lastly, while this will certainly burden publishers, and especially those whose analog businesses are in heavy decline, as well as those who were 100% digital from the get-go, these new terms don’t amount to Armageddon for most.  Consider that for the time being, digital is a smaller segment than offline for traditional businesses, and within digital, Apple commands only one, albeit important, channel.  The magnitude will obviously vary by publisher.  But consider the example of the Financial Times, which reports that only 10% of its subs come through the iPad.

The bigger issue than the tax, I think, is that Apple has said that publishers will not receive customer names or email addresses unless opted-in by the new subs.  If they don’t, as will often be the case, it will make renewal marketing a bit more challenging (see the CLV argument), but not nearly impossible.  For instance, publishers could promote renewals through their service interfaces directly – as users log-in to access their content, the publishers will know who they are and the status of their billing relationships, even if not by specific name.  I suspect that smart, customer-minded publishers will make it worthwhile for users to opt-in, perhaps by offering something of incremental value, such as additional subscription months, exclusive content, or entry into a prize drawing.

Understandably, publishers need to make a lot of noise up front, and to vocalize their discontent with the new Apple terms.  After all, any charge that didn’t exist before is now going to negatively impact their margins.  But in the end, Apple is entitled to receive a commission for the channel it provides, and the more integrated purchasing experience is good for the consumer.  And a new channel with a relatively low customer acquisition cost is certainly good for the publisher.

The missing half of Mary Meeker’s Internet Trends presentation

February 11, 2011 § 3 Comments

Mary Meeker, formerly with Morgan Stanley, and now a partner at Kleiner Perkins, enjoys heavy praise each time she puts out one of her “state of the digital economy” Powerpoint decks.  I’m not quite ready to jump on that bandwagon.  Don’t get me wrong … I love having access to all that rich information in one, convenient place.  But these presentations (often 50+ pages) are heavy on charts that illustrate the past, and light on analysis that anticipates the future.   In her latest deck, you have to wade through 22 slides before arriving at one with original content (from KP’s portfolio companies) — all the prior slides, and most of those that follow, regurgitate data from 3rd party sources.

Mary Meeker, Internet trends (February, 2011)

Ms. Meeker compiles tons of interesting data to tell an articulate story of what’s already happening out there, but what I’d really like to see from her and her obviously talented team, are the implications.  How will these trends, such as the rapid rise in smartphone penetration, impact our economy, how we do business, or how we function in our daily lives?  Based on the trends she reports, here are some of the questions that need answering:

  • Will closed systems (like Apple’s) and open systems (like Google/Android’s and Microsoft’s) continue to co-exist, or will Apple eventually fall, like it did in the first PC era?
  • Are the people who buy iOS devices vs. Android vs. Windows Phone really that different?  And what does this mean for development and marketing strategies?
  • Will yesterday’s deal between Microsoft and Nokia be enough to save either company’s mobile business?
  • Will there be a shift in focus from app quantity to app quality?  In a market with 100s of thousands of choices (and counting), how will new publishers and developers break in?  Will the discouraging odds of getting noticed drive would-be app developers to other platforms?
  • Will the emerging dominance of mobile computing cause new businesses and business models to optimize first for mobile (rather than first for PC, which is typical now)?  What are these businesses likely to be?
  • How can domestic companies compete with international competitors, particularly in markets with greater long term upside than in the U.S. (Brazil, China, India)?
  • Is Facebook becoming like AIG … getting too big and central to fail?
  • Is the social aspect of social networking just a fad?  Will the focus of social platforms be entirely different 5 to 10 years from now, i.e., a bigger, broader purpose?
  • Is the longevity of today’s stars such as Groupon and Zynga determined mainly by their latest innovations, or have they created sustainable, defensible models worthy of continued investment?  Will these companies become platforms on which entire ecosystems can be built, creating opportunities for new businesses and consumer benefit?
  • What will be the next significant consumer or B2B behaviors to be disintermediated by mobile?
  • Will mobile users tolerate mobile advertising, and does it depend on format?  Will mobile advertising be effective?  If the answer to either of these questions is “no”, what business models will justify additional investment?
  • Are there any limits to what people will purchase on a mobile device (mcommerce)?

Of course there are countless other questions one could ask.  Now that Meeker has broadened her scope from market analyst to business builder, I hope she will see fit to take her presentations to the next level.  But Mary, if you’re listening, can you try to keep it under 60 or 70 pages? 😉

Video entertainment … the fantasy list

February 3, 2011 § Leave a comment

If you’re in the media industry, you can’t avoid being caught up in the frenzy that is streaming video.  It’s the talk of the town.  Netflix this, and Hulu that.  There’s innovation from every angle, disruption of business models, and even venture dollars streaming in (pun intended).  It’s terrific fodder for the blogosphere.  Judging from the proliferation of products and services over the last few years (Amazon, Vudu, Roku, Boxee, Google TV, Apple TV, and so on), the market’s ready for services that let us access our content when and how we choose.  But for all the new solutions out there, none has fully delivered on the promise, which I’ll summarize as my media, my way.  The ideal is still a figment; leaving one to fantasize how, if given supreme power and influence, he’d design a solution from the ground up that meets all his needs.  My own wish list, which I think probably speaks for many, would include the following:

  • Provide a LOT of programming options, covering a broad range of genres and formats (i.e., short and long form).
  • Live programming, especially news and sports.  I would also have access to the content I want on demand.
  • The menu UI and navigation would be simple to use and easily harness the myriad of content choices.
  • Let me choose what to watch, and when, but also cater to my passive moods (which is most of the time when I’m watching TV) and curate the “must see” programs for me.
  • Deliver much of my content in HD.  And in the near future, HD3D (I’m happy to wait for when the goggles are no longer necessary).
  • Be ultra reliable, resistant to severe weather conditions, and don’t degrade in quality even if everyone in my neighborhood is online at the same time.
  • Push my content instantly.  Little or no time for downloading or buffering.
  • Seamlessly connect with my TVs.  It wouldn’t require another hardware component on the shelf, or if it did, it would be a small footprint.  Setup would be quick and straightforward.
  • Deliver content to my other screens as well – my PC/tablet and my smart phone.

A demanding list, I know.  But wait a second!  Doesn’t a cable subscription and DVR, combined with TV Everywhere deal structuring and authentication, deliver all of the wish list items, at least in part?  For all the hype out there, isn’t cable TV still the single best solution?  One of the last big pieces, streaming live video to our PCs and smart phones, appears to be falling into place with the latest deal announced earlier this week between Comcast and Turner.  VOD windows are shrinking as well.  The other domino is device compatibility, which is in the midst of tipping too (see also Comcast for iOS).  Comcast is obviously ahead of the curve on these initiatives, but is a reasonable proxy for the direction of the industry overall.

Don’t get me wrong – I’m not saying that the cable guys don’t have more work to do.  But with all the hubbub about the online-only challengers, it’s easy to lose sight of just how close the incumbents really are to the goal line.  The fact is that the challengers have a much bigger gap to fill.  Any household that chooses to “cut the cord” as things stand today will do so only with great sacrifice.  This video summarizes it nicely. 

My point is this … the online guys have helped to identify the market need, and in doing so, have been getting much of the attention.  But the buzz around their efforts has sounded the wake-up call for the paid TV incumbents.  Yes, traditional, subscription TV is expensive, and yes, the challengers will continue to work on the large gaps in technology and content (driving up their cost of goods, I might add).  The incumbents, though, have a solid head start, and the technology, the capital, the content relationships, and (maybe most importantly) the incentive, to strike back hard.  Already, they, and especially Comcast, have demonstrated that they can move relatively quickly.  So before you join the pile-on, give the cable guys some credit.  They will not sit idly by.  In fact, we can expect them to come out swinging.

A call for better alignment between Product Management and Strategy

January 11, 2011 § Leave a comment

I was invited by the Technology Association of Georgia (TAG) to join a panel tomorrow on issues related to Product Management and Strategy.  The event is postponed due to the snow and ice, but the weather won’t deter me from commenting on what I think is a very worthwhile and timely topic.  Changes in the business environment, and particularly within the technology field, are imposing new demands on both functions, and together, they can navigate them more successfully.  We hope to reschedule the session soon, but in the meantime, here’s a summary of my point of view on the topic …

There is a fundamental gap between business owners’ requirements and the resources actually available to deliver them.  Strategic planning processes often fail to pick up or resolve this issue, and produce plans that can be unrealistic in terms of timing and resources – business owners later gripe that their failure to deliver against plan is the fault of Product or Engineering.

To compensate, business owners argue for dedicated Product and Engineering teams, which are often prohibitively expensive, or submit aggressive ROI models to ensure they are allocated the resources they need from central planning.  But even if resource allocations are “optimal” for a certain point in time, product innovation and development are not static processes given fluctuating market needs, unforeseen competitive threats, and unpredictable supply chains.  The average PLC is shortening and is more susceptible to disruption than ever before.  Companies and industries stuck in long planning and development cycles must either defy the odds and predict the future, or develop product that may be on the path to obsolescence even before it’s released.  Recall how Microsoft’s Kin was killed 2 months after launch in favor of Windows Phone 7 devices, following a 2-year development cycle initiated with the 2008 acquisition of Sidekick maker Danger.  Given this backdrop, I see several developments:

  1. Shortened planning cycles (e.g., quarterly, from annual), or more likely, continuation of the annual planning process, augmented with lighter monthly or quarterly refreshes.
  2. More iterative strategic planning processes that better align business plans with centralized resources (which means the process needs to start in Q3, rather than the all-too-common mad dash in Q4).
  3. Continued adoption of the Agile SDLC method – competitors whose business models depend on massive code pushes will need to challenge the status quo (note how Microsoft, taken to school by Google Docs, is preparing to launch Office 365, the cloud version of its popular software franchise).
  4. Extension of Agile development approaches to strategy and decision-making, highlighted by deconstruction of complex problems into smaller, testable implementation stages to packetize risk (what academics call “option value”).
  5. Increased levels of cross-training within centralized engineering/development teams to increase flexibility and maintain alignment between supply and demand across the enterprise.
  6. A challenging of the notion that core competencies cannot be outsourced – I’ve now worked for two companies, large and small, that outsourced major development projects because the resources didn’t exist internally, the vendor quality was high, and the cost was unbeatable.  Obviously, outsourcing won’t be viable in all cases, but it’s time to challenge the old assumptions.
  7. Adaptation of key functions, such as Product Management, to support the new reality.  PMs will need to manage global vendors, continuously align shifting resources with development projects, navigate fluctuating priorities, and work with business owners to determine how to create and deliver a roadmap broken into bite-sized pieces.

The 2010 Uber List

December 28, 2010 § Leave a comment

As we are rapidly approaching the end of a very eventful year, it’s only appropriate to deliver what every loyal blog reader craves during the transition from one year to the next – a top 10 list.  But as I indicated, it was a very newsworthy year (the iPad launches, Facebook approaches 600M users, and Atlanta gets a white Christmas for the first time in as long as I can remember, just to name a few), so far be it from me to restrict the topic to a single dimension.  No, what I am providing here is a list of lists … my top 10 top 10 list.

Some proactive damage control:  Not all the lists are top 10, literally.  Some more, some fewer.  “Top 10” is just an expression, ok?  A short hand way of saying, ‘here’s a list of some good stuff you might want to know about’.  Second, after eyeing the categories I’ve selected, you will no doubt be chomping at the bit to inform me of the most important categories that I either inadvertently or intentionally left off.  Well, keep in mind that the subject of this blog will dictate, to some degree, the scope of what made it to my uber list, but also allow me the creative freedom that comes with these types of end-of-year posts.  And you may want to reserve judgment — hint, hint — until you’ve reviewed the final entry (list #10).  But more importantly, if you’re sitting on a tack, and just have to give me your feedback or else you’ll scream, then go ahead and post a comment – that’s what they’re for!

And third, you’ll quickly notice that I’ve curated a bunch of third-party lists, rather than construct my own.  So where’s the original thinking, you may be asking?  What’s the insightful overlay?  Well, I could have selected any list to post here (and there are many, many to choose from), but I didn’t — I selected these.  And you’ll also notice that many of the lists are based on factual data (for example, #3, the most downloaded Android Apps of All Time), not opinion.  But where opinion is warranted, such as in #1 (The Top 8 Gadgets of 2010), the list reflects my thoughts as well (or at least a very close proximity to it).  So enjoy.  Be informed.  Be inspired.  Be outraged!  But mostly, have a very happy and healthy new year.  See you in 2011.

List #1. The Top 8 Gadgets of 2010 (Impact)

List #2. The Top 40 iPhone Apps (Usefulness) 

List #3.  The Top 30 Android Apps of All Time (Downloads)

List #4.  The Most Followed Twitter Accounts (# Followers)

List #5.  The Wealthiest People in the World (Net Worth)

List #6.  The World’s Happiest Countries (Survey)

List #7.  The Top Blogs of 2010 (# Readers)

List #8.  The Top Movies of 2010 (Box Office Gross)

List #9.  The Top 40 Restaurants in the USA (I’ve only eaten at one, and if it wasn’t on my favorites list, it certainly earned a spot among the most expensive)

List #10.  The Top 10 of Everything List (According to Time Magazine)

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