Category: Analysis

AT&T hosted two days of meetings with industry analysts last week, covering a broad array of topics across its consumer and enterprise businesses. Having attended many such tech industry analyst meetings over the years, I found the discussions last week to be unusually wide-ranging and forthright. AT&T has made some pretty significant bets over the past 2-3 years — acquiring DirecTV; investing heavily in the Mexico market; moving aggressively to re-architect its network; and increasing its commitment to building out fiber, among other initiatives. Although Wall Street might be unexcited about big telco stock prospects in the near term, I came away with a fairly positive impression of AT&T’s long-term direction.

What follows are some big picture takeaways across some of the major business segments.

DirecTV
When AT&T announced its plan to acquire DirecTV in 2014, I was skeptical. It was clear then, and it remains so now, that traditional pay TV, a la big bundle, is a flat=to-declining business. Rising content fees have trimmed margins. Having spent time speaking with AT&T executives in recent months, I have started to warm to the deal. First, AT&T has moved quickly to leverage its two largest (and not very fast growing) businesses as an important customer acquisition and retention tool. It’s a believer in the bundle, offering healthy incentives to attract the 15 million DTV customers to who don’t have its wireless service and the 21 million wireless customers who don’t have DTV. This has started to show some positive results. Second, in the hyper-competitive wireless market, where the deltas on network quality and price have narrowed in recent years, content and TV Everywhere could be an important differentiator, especially given Verizon’s recent moves with AOL and Yahoo, and Comcast’s potential entry into the wireless business. AT&T has also renegotiated a lot of its content deals so they are technology agnostic.

The next year will be critical, however. Within the next several weeks, AT&T will be launching DirectTV Now, its skinny, over-the-air bundle aimed at Millennials. It is premature to speculate on the prospects for Now, since AT&T did not reveal the content lineup. The skinny bundle market is becoming a crowded space and successes so far have been modest. AT&T is also spending big sums to revamp the back office operations of DTV, improving its somewhat dated looking user interface, and steadily rolling out more contemporary set-top boxes. Part of the grander plan is to use big data to deliver more relevant, targeted advertising to DTV subscribers. AT&T is firing on a lot of cylinders here – much lies in the execution.

Mexico
AT&T has moved quickly in Mexico since it acquired Iusacell and NII Holdings in 2015. Mexico under-indexes its peers in terms of wireless penetration, network quality, and level of competition. Deploying LTE to the mass that is Mexico City in barely a year is no small accomplishment. There is no question Mexico is an important growth opportunity in the longer term and offering free roaming to U.S. and Mexico subscribers is a good differentiator. The risk is the significant level of investment required, given Mexico’s still high economic and political beta.

Fiber and AirGig
AT&T has increased its commitment to fiber deployment, which is somewhat of a contrast to the plans of some of its competitors such as Google and Verizon. Part of this plan is a commitment to bring fiber to 12.5 million locations by 2019. But the bigger deal is the plan to deploy more fiber closer to a lot of homes, businesses, and MDUs. Why the evolution in strategy from only a couple of years ago? AT&T claims the costs of deploying fiber have come down significantly, so the economic equation is more favorable. The other catalyst is the need for big fiber backhaul pipes to support the growth of video, AR/VR, and even 5G wireless.

AT&T also provided a few details on its innovative Project AirGig, which uses antennas sitting above (but not on) utility poles to regenerate millimeter waves from station to station, potentially delivering fixed wireless broadband of potentially 1 Gbps speeds. AirGig is to AT&T what the self-driving car is to Google: a ground-breaking, still experimental technology, ten years in the making, that could radically alter the economics of backhaul and small cells. This is a 2020 thing, not a 2017 thing.

Network
AT&T has been at the forefront of the move to a software-defined network, having already virtualized 30% of network functions, with plans to get to 70% by 2018. Why is this important? Network service providers have realized for some time that the monolithic, hardware-centric network approach is not sustainable from the standpoint of capacity, agility, and economics. Most major telcos are on relatively the same page with respect to where their network architecture needs to go. Nevertheless, it is a huge transformation, in terms of approach, what it means to vendor relationships, the skill set required of employees, and ultimately moving to new models of how the network will be monetized.

AT&T was a little more sanguine about 5G. On the one hand, network executives are excited about 5G’s potential to deliver the faster speed and lower latency required for certain devices and applications. On the other hand, there was a dose of realism that 5G is a 2020 and beyond thing, and deployment will be in pockets, with LTE still forming the primary coverage layer for the foreseeable future. I am of the view LTE still has a lot of legs. The LTE Advanced Pro roadmap, plus opportunities in the unlicensed band, has the ability to deliver significant improvements in network performance and capacity over the next few years, with many of the attributes envisioned for 5G.

Mobile
Mobile comprises more than half of AT&T’s total revenues, but the traditional cellular market is showing signs of maturing. This is why both AT&T and Verizon have made some pretty aggressive bets over the past two years to provide them with the source of the next $10+ billion in growth. AT&T’s key strategic pillar is focused on mobile entertainment, leveraging the DirecTV asset to deliver video to subscribers wherever they are and to any device. AT&T says it has the mobile network capacity to accommodate what could be a 7-10x increase in data traffic over the next 3-4 years. One key question is whether it can deliver all that mobile video profitably. Remember, its wireless services business has had pretty impressive margins over the years. Another question is whether AT&T needs unique content in order to deliver a differentiated value proposition. There was some tacit acknowledgment this might be the case, but the strategy around this still appears to be formulating.

IoT is another area of major emphasis and potential. AT&T has built a large organization and has devoted significant resources toward IoT. The company has seen some solid success in the connected car segment. Although AT&T will capture its fair share of the ‘billions of connected devices’, it is still difficult to gauge the dimension and timing of the opportunity and which sectors will drive it. IoT is a different type of business: base hits and maybe a couple of doubles, but few triples or home runs.

One disappointment was on the device side. AT&T did not lay out a compelling vision of the device and wearables roadmap, other than being the channel for lots of iPhones and Galaxies. I would like to have heard some more forward thinking about how AT&T might deliver a differentiated experience on those devices, about efforts to partner with OEMs to create exciting devices to help AT&T execute on its video and IoT vision, or plans to offer greater vendor diversity.

AT&T has held these industry analyst gatherings for several years running, so it’s an interesting benchmark on the state of the company and of the industry. This year, I find AT&T with a more finely honed strategic direction, focused on becoming a premium mobile entertainment company and evolving its network to deliver on that vision. The next stage will be very focused on execution, and how a transformed telco fares in a broader competitive landscape.

This week saw Google announce a variety of new hardware products. But the main theme of Google’s event wasn’t actually hardware but software: specifically, artificial intelligence. Microsoft’s Ignite event last week also made AI a major focus, with Satya Nadella’s keynote titled “Democratizing AI”. Even Apple, not normally prone to talking about the technology behind its products, has started sprinkling references to machine learning and related concepts into its keynotes. It’s clear AI and machine learning are hot topics but there’s a risk these concepts become the main point. What they do for customers should be the real focus.

Ahead of Google’s event this week, I was approached by a number of reporters wanting to discuss the possible announcements and their relevance. One particular reporter asked about the AI angle and this was my response:

The big thing about AI is no-one outside our circles actually cares. What they do care about is whether their devices and services do useful things, but whether it’s using AI, machine learning, or convolutional neural networks is totally irrelevant. So Google, Microsoft, and Apple can talk up AI at these events all they want, but they’re largely talking to the tech press and a few nerds when they do so, not to end users. The old moviemaking maxim “show, don’t tell” definitely applies here when it comes to real people.

The fact is, big tech companies always have several audiences when making big announcements or holding events and they speak to each of these audiences differently. Among those audiences are:

• Consumers – the end users and often the purchasers of products and services
• Enterprise decision makers – sometimes the purchasers of technology that ends up in the hands of end users
• Media – although this is becoming a little less true over time in the era of live streaming events, still the main conduit through which news about announcements filters through to consumers and enterprise decision makers
• Financial analysts – those who have to build models and ultimately advise clients on whether to buy or sell stock in the company making the announcements
• Observers – all the others who are interested in what’s being announced but don’t belong in the categories above – including industry analysts like me, who have to form an opinion about the company professionally, but also hobbyists and tech enthusiasts who are interested in trends, strategies, and so on

The problem with the current AI obsession is all the big tech companies are focusing, to a great extent, on every audience but that first one – consumers. As I said to the reporter, consumers don’t care about AI – many of them probably think it’s a movie starring Jude Law and the kid from Sixth Sense. What consumers care about is the output of all that AI and machine learning – the features on their phones and in their online services which actually make their lives better.

Whether there’s AI behind those features is utterly irrelevant from a user perspective. But the fact your phone seems smarter than mine, or my email service seems better at filtering out spam or suggesting automatic responses than yours, or the digital assistant on my new phone seems to understand what I say better than my old one – that’s what really matters.

Yes, AI, machine learning, and plenty of other technologies are behind many of the advances in the technology we use every day. But that doesn’t mean we as consumers need to know that, any more than I need to know how the plane I’m writing this post on is staying in the air. It may be interesting to a subset of customers but that’s not nearly the same thing.

And that’s where my parting comment in the quote comes in. In the moviemaking industry, one of the key principles is “show – don’t tell”. What that means is there’s a tendency, when providing exposition in a movie, to have a character talk through everything the audience needs to know. But that’s far less effective than showing the audience what it needs to know through characters’ actions rather than their words. That’s harder to do – it requires more creativity and may force you to pare back some of the complexities in your story if you find it impossible to explain it to your audience using action rather than words.

That principle should be taken to heart by tech companies too. If you’re unable to demonstrate the practical benefits of your AI chops to users, your story needs work. And your AI story will be a lot more powerful if you demonstrate it with actions rather than having to describe it with words. Especially in a consumer-facing context, tech companies need to show first, tell second (if they tell at all). Demonstrate the great new features and then (if necessary) talk about how it’s done afterwards.

Now, that’s not to say talking about AI or machine learning is always wrong. This is where we come back to that list of audiences from earlier. For a number of those audiences, investment in new behind-the-scenes technologies is a really important factor in making judgments about your company. Financial analysts, the media who shape narratives about companies, and others may all want to know more about these things. But those selling technology should never make telling that story the primary focus, especially in events which are designed for an end user audience.

If you ever want to enliven a cocktail party filled with executives from the telecommunications or cable industry, just start talking about dumb pipes. As in, “your service doesn’t offer anything more than a simple connection from my devices to the internet content I want—it’s a dumb pipe.”

Of course, most of you will never have to worry about going through such an awkward social encounter, but if you do—that zinger is bound to get things going.

All kidding aside, the notion that telco carriers and other service providers have provided little more than basic connectivity has been an industry hot button for quite some time. Even now, despite a number of efforts to spice things up, most telcos and cable service providers are seen as companies that provide a very indistinct connectivity service that people only reluctantly pay for.

The primary differentiators for competitive players in this space are price, price and, oh yeah, price, with maybe a bit of coverage or service quality thrown in for good measure. It’s little wonder that many consumers hold these companies in such low esteem—they just don’t see the value in the services beyond basic connectivity. It’s also not surprising that so many people are looking at cord-cutting, cord replacement, or other options that attempt to cut these service providers out of the picture.

But it doesn’t have to be this way.

The amount of data that telco and cable service providers have access to should allow them to generate some very interesting, useful and valuable services that consumers should be happy to pay for. Now, admittedly, there are some serious privacy and regulatory concerns that have to be taken into consideration, but with appropriate anonymizing techniques, there are some very intriguing possibilities.

For example, by leveraging new machine learning or artificial intelligence algorithms, service providers should be able to aggregate data usage patterns to help determine everything from traffic patterns, to breaking news algorithms, program recommendation engines, and much more.

At a more basic level, who better to manage things like my contacts, or offer an intelligent, unified communications service that lets me see and manage all my various forms of communication, than the companies over whose network those messages travel?

Ironically, for those who are particularly privacy sensitive, the notion of paying for a highly secure, completely anonymized truly “dumb pipe” could also be an attractive option. While certain levels of privacy and security should be expected (nee demanded) from service providers, the notion of paying for extra security is something I believe most consumers will start to really appreciate.

More critically, there is a crying need to provide some kind of smart hub inside our homes so that we can easily see, connect and manage all the potential connected devices and services in our homes: from smartphones, PCs and tablets, to TVs, lights, HVAC controls and even smart cars. But instead of offering an intuitive, friendly device similar to something I wrote about a few weeks back (“Rethinking Smart Home Gateways”), service providers continue to offer non-descript black boxes whose very designs belie their archaic, impenetrable means of operation.[pullquote]The fundamental problem is that service providers act more like utilities than companies that offer services people are happy to pay for, such as Netflix. [/pullquote]

The fundamental problem is that service providers act more like utilities than companies that offer services people are happy to pay for, such as Netflix. There’s little sense of personalization or differentiation from service providers and the aforementioned router/gateway boxes they currently force into consumers’ homes are a classic example of that utility-style of thinking. Honestly, if your power company was to put a box into your home, do you think it would look much different?

In order to break this cycle, and avoid the risk of being cut straight out of people’s lives through various types of cord-cutting/replacement mechanisms, service providers need to start thinking very differently about the types of services they offer. They need to create, discover and deliver services that people actually value, and do so in a more personal, non-utility like way.

To their credit, a number of the major US telco and cable providers are making efforts to reach these goals, but they still primarily reflect a utility mindset. To break that means of thinking, they would be wise to look at how providers of services on the Internet—whether that be someone like Spotify, Uber, or Amazon—build and sell the kinds of services that consumers are more than happy to pay for. Only with that kind of out-of-the-box thinking can they truly move past their utility-driven focus and stop being little more than “dumb pipes.”

I’m fortunate to be a part of several circles here in Silicon Valley that get together frequently to discuss big ideas and engage in all kinds of technology related philosophical questions. I started sharing a concept with this group and was encouraged to flesh it out further. So I would like to introduce it to all of you for thoughts and feedback. Consider this one of those posts you need to have your thinking cap on. I’m calling this concept “Behavioral Debt” and it explains why a company’s customers don’t act or do the things they want them to.

The simplest way to understand this is with the popular saying, “You can’t teach an old dog new tricks.” I am attempting to put more understanding around this idea as it relates to the consumer tech landscape. I run into issues around behavioral debt regularly in my research on the consumer market. Companies want to know why their customers aren’t buying new products or services they offer while their old ones seem to be all their customers are interested in. In most cases, what we observe is simply entrenched behavior that is very difficult to evolve. Once a behavior is established, debt is built up around it. The longer that behavior remains entrenched, the larger the pile of behavioral debt. The larger the pile of behavioral debt, the more difficult it is for that customer to climb out from under it.

Let’s use a tangible example in Facebook. Facebook would like to move into a more transactions-based model for the buying and selling of goods on their platform. Here we may likely see the messy reality of behavioral debt rear its ugly head. Consumers have built up years of behavioral debt doing a few main things on Facebook. Consumers are likely content in this reality and, when they want to buy something, they go to Amazon or some other established online merchant. Facebook wants to offer them the chance to do this on Facebook so they don’t have to leave and spend time and money somewhere else. But “you can’t teach an old dog new tricks” and I have a feeling convincing consumers to do anything more than they do today will prove quite tricky for Facebook due to the many hours/years spent building up behavioral debt in how they use Facebook.

Similarly, Intel, Microsoft, and the PC makers would all like to sell more of the 2-in-1 PC concepts. These devices are not the cheapest machines on the market but they offer better margins. The problem is, 2-in-1 PCs sell at a fraction of the volume of notebooks. What Intel and Microsoft have not yet learned is there is a massive amount of behavioral debt built up around the PC form factor. People understand it, they are comfortable with it, and they have established workflows on it. Many of you have heard me say those who grew up with a PC have a bias for it. This bias is explained by behavioral debt.

This idea of behavioral debt also showed up recently in our mobile payments study. In markets like the UK, where consumers have been tapping to pay with their physical credit cards for years, many consumers (nearly 40%) said they have yet to embrace paying with their smartphones (which they acknowledge is safer and more convenient) because it is still easier to use their physical cards to tap and pay. Another 25% said they simply forget they can use their smartphone to pay instead of their credit card. This is a prime example of behavioral debt and showcases why changing an established and entrenched behavior is extremely difficult.

This is why we observe consumers in emerging markets or the Gen Z kids of today do things with their smartphones and tablets many of us can’t believe. We see them do things and think there is no way they can do them without a PC. The reason this “you can’t do real work on a tablet” phrase keeps erroneously showing up is because those who use it have a ton of behavioral debt around PC-based workflows. Those who do not have PC behavioral debt are free from those biases and are able to break what seems like new ground but is entirely natural to them.

This should also be recognized by startups trying to do something similar but better than what a popular service already does. We see startup after startup offering a feature, like a messaging app or a commerce store that proposes to be better than what hundreds of millions of people already use. More often than not, these fail because, when behavioral debt is built up, the person rarely wants better — they simply want familiar.

Getting customers to break free from behavioral debt is very hard. It also seems it is very rare given the case studies I’m finding and working through. In fact, it could be observed it is so rare when consumers fundamentally change a behavior that it should be considered quite profound. Doing so means an acknowledgment the new way is dramatically better and thus the behavior change is swift. This happens less frequently than we often believe in consumer markets. This one point, circling back to Facebook, is what makes something like Snapchat so interesting. Snapchat is on pace with Facebook in the number of videos played. The main difference being the vast majority of videos played on Facebook are not clicked on where in Snapchat they are. Facebook wants/needs videos to be successful but their users just want to get on Facebook, post a picture or share something, see some posts from others and move on. Getting video engagement has been a challenge for Facebook because of their users’ behavioral debt. But with Snapchat, video was the assumed experience from the beginning. Starting fresh means starting without behavioral debt. This is why, in my opinion, Facebook must continue down the road of acquiring a family of assets which encompass the needed consumer behavior. Buy Snapchat for video, Twitter for real-time news and global social communication, and whatever else springs up.

This week, Apple announced yet another enterprise partnership, this time with Deloitte. Next week, Facebook is expected to open its Facebook at Work product to more companies and with a tweaked business model. For Insiders, I wrote recently about Samsung’s push into the enterprise mobility space. It’s increasingly clear consumer technology companies don’t just want to stay in the consumer box. They’re quite keen to take a stake in enterprise, even as erstwhile leaders in the enterprise device space like BlackBerry decide to exit the market. It’s worth exploring why and what their prospects are.

The fastest-growing segment in mature smartphone markets

Less than a year ago, in reporting on Apple’s September 2015 quarter, Tim Cook said:

We estimate that enterprise markets accounted for about $25 billion in annual Apple revenue in the last 12 months, up 40% over the prior year and they represent a major growth vector for the future.

During that same timeframe, Apple’s total revenue was around $276 billion. So enterprise markets accounted for around 9% of all of Apple’s revenues. Bearing in mind several Apple categories aren’t even really applicable in the enterprise (including the iTunes store, iPods, Beats, and the like) the percentage of addressable categories is likely even higher. A year later, the 9% figure is probably in the teens, since Apple’s overall revenue growth was 28% that year and has been flat or negative since.

The reality is, in the context of mature and increasingly saturated consumer smartphone markets, the enterprise represents a large untapped market for smartphone sales. And, for a company like Apple, also for iPad, Mac, and even Apple TV sales, given its historically low penetration of the computer and conference room display markets. The challenge for Apple as first and foremost a consumer technology company is that it doesn’t have the skills or other assets to make complex sales in the enterprise, especially when those sales need to be tied to consulting, app development, and broader business transformation to be effective.

This, of course, is where Apple’s set of four major enterprise partnerships come in. IBM has developed over 100 apps for iOS, while Cisco networking optimizations are built into iOS 10 and SAP has created SDKs for iOS to allow software developers to tap into its software. The Deloitte relationship now takes this a step further and has a major consulting organization selling business process transformation capability closely tied to iOS devices. While Apple itself has focused on making it quicker and easier to deploy fleets of iPhones and iPads in the enterprise for generic productivity use, these partnerships take that a step further and focuses on the more customized, process- and industry-specific use cases many enterprises need to support.

As I mentioned, Apple is not the only company doing this – Samsung has made a big investment in enterprise mobility and security around its smartphones in order to facilitate a push into the enterprise and will be pushing even deeper as it seeks new growth opportunities while its consumer business grows more slowly.

Consumerization of IT the enabler

The enabler for all this is what’s often been called the consumerization of IT. There was an interesting transition that happened from the time I first started working in the 1990s through the early and late 2000s. When I first started working in an office, everything was better technologically there what I had at home – I experienced things like email, broadband internet, and more first in the workplace and only later at home or in college. But in the mid- to-late 2000s, things began to change. I experienced technology like the new breed of smartphones, mobile apps, web apps, and social networking first in a personal context. These things tended to arrive at work only as people like me brought them there and tried to make them fit in corporate settings. There had been earlier examples – executives bringing personal laptops to work being an obvious one – but those had remained the exceptions rather than the rule.

The iPhone was arguably at the center of all this, as one of the things that pioneered the bring your own device (BYOD) model in the workplace, but also as an enabler of many of the apps that would make the same journey later. All of this fomented a sea change in purchasing patterns around technology, in which the buyers went from being heads of IT departments to being end users. The same transition later enabled apps like Dropbox, Yammer, Google Docs, and Evernote to take hold in the enterprise in a very different way from the apps they often displaced – starting with individual end users and only later catching the attention of IT departments.

Consumerization of IT goes back the other way

The interesting thing about Facebook at Work is that it’s both offensive – in the way Apple’s and Samsung’s forays into the enterprise have been – and defensive at the same time. Whereas saturating smartphone markets are the driver for Apple and Samsung in the enterprise, it’s a saturation of leisure time that’s driving Facebook to look into people’s working hours as a possible new addressable market. But it’s also a threat from a new breed of enterprise applications threatening to come back into the consumer market that’s driving Facebook from a more defensive posture.

Slack is one of the latest and most successful of a breed of enterprise apps that has piggybacked on the consumerization of IT trend, borrowing heavily from consumer app design and user interfaces, and enabling individual employees to sign up without any sort of corporate blessing. End users love it but, as a result, many are using Slack in settings for which it was never intended – planning dinner with their spouses, discussing weekend plans with friends, or managing PTA meetings with fellow parents and teachers. After roughly a decade of tech going from the consumer world into the enterprise, we’re now seeing some of this technology going back the other way and that’s the threat to Facebook. Having failed to capture people’s attention in the enterprise proactively, Facebook now finds itself having to do so reactively as a bulwark against possible encroachments from enterprise apps.

We’re going to see more of all these trends – the increasing consumerization of IT within the enterprise, both from a devices and software perspective, the bleeding back into the consumer world of certain functionality, and the efforts from consumer technology companies to push into the business world as both an offensive and defensive strategy. That requires a major strategic and cultural shift on the part of many of these companies and they’ll inevitably need help from established players in those markets along the way. Facebook seems to think it can go it alone. It will be fascinating to see if it can succeed.

If you have made a payment at retail with your smartphone and are anything like me, you’ll feel this is the future of payments. But as the famous quote from William Gibson says, “the future is here. It is just not evenly distributed.” After conducting some research in the US, UK, and Australia, it would be hard to find a more appropriate phrase for mobile contactless payments.

Last fall, the United States went through a drastic disturbance in consumer retail stores thanks to the EMV shift, which moved us from swiping our credit cards to inserting them into a terminal and waiting for the transaction to complete. With the average transaction time still taking between 5-10 seconds, down from 15 seconds six to eight months ago, US consumers have had friction added to their checkout process. It is with this retail experience in mind we were hopeful, last fall, that mobile contactless payments would take off. Toward the end of 2015, roughly 17% of iPhone owners had used Apple Pay, and 7% of Android owners had used Android Pay. Part of this had to do with less than 50% of the iPhone installed base in these markets having devices that are Apple Pay capable. An even smaller number of Android-based devices in use are NFC capable. Here we are a year later, with exponentially more smartphones in the market NFC capable, and interestingly, not a lot has changed.

When it comes to tap to pay terminals, the US is well behind markets like the UK and Australia. While we are still in early days with consumers paying with their smartphone in those markets as well, a majority of consumers there are already using tap to pay on a regular basis using their bank-issued card with an NFC chip in it. We decided it would be interesting to study consumers in the UK, Australia, and the US in order to see the contrast between mature contactless (tap to pay) payment markets and one like the US where it is all brand new.

We asked consumers in the US, UK, and Australia if they have ever used a form of contactless payment, defined as tapping to pay with your bank-issued card or mobile phone.

As you can see when it comes to contactless tapping to pay behaviors, markets like the UK and Australia, with bank-issued cards that have tap to pay functionality and the vast majority of merchants accepting tap to pay, it paints a very different picture than the US market. Where ~80% of consumers in the UK and Australia have used a tap to pay method, 80% of consumers in the US had not. Part of this has to do with minimal acceptance of contactless methods at US retail, compared to many merchants accepting it in the UK and Australia.

To further highlight the stark differences of the US market compared to the UK, and Australia, where a form of contactless payment is a normal transaction behavior, 61% of US consumers said they are not that familiar or not familiar at all with any kind of contactless payment method. One solid conclusion from our research is we still have a lot of educating to do on the US market.

Room to Grow for Mobile Payments

After studying all three markets, what I found most interesting was first, the disparity between consumers using contactless in the UK and Australia and those not using it in the US as outlined above. The second thing that stood out was how all three markets were remarkably similar when it came to usage of mobile contactless payments. Meaning, using something like Apple Pay, Android Pay, or Samsung Pay.

The chart shows the types of contactless transactions consumers have tried in all three markets. Interestingly, while tapping to pay with your credit/debit card is an established behavior in the UK and Australia (over 50% of the market uses this method on a weekly basis), consumers in those markets have yet to fully transition their contactless payment behaviors from their credit/debit card to their smartphone, even though it is accepted almost universally in their country.

When it came to which mobile contactless payment was most popular among those who said they have used their mobile phone to tap and pay, Apple Pay is the most common form of mobile payment with 62% usage share of mobile contactless methods compared to less than 30% for Android Pay and Samsung Pay respectively.

While we are still new to paying for goods and services with our smartphones, the future seems bright. Our research found consumers who have used Apple Pay, Android Pay, and Samsung Pay had high satisfaction levels with the experience, with speed and convenience the biggest factors in their satisfaction, and a high propensity to use it more often in the future.

Security Still the Largest Barrier for Non-Users

The sleeper story for consumers is security. While this happens to be one of the single most important reasons to adopt contactless payments, it is also the one least understood by consumers. In all three markets, 40% of consumers listed security concerns of adding their credit/debit card to their smartphone as the main reason they have yet to try it, while 29% said not trusting the transaction was secure as their main reason.

In an era of heightened awareness of identity fraud, merchant breaches of credit card data, and more, it is not surprising security concerns came up time and time again in our study. Yet, a data point that stood out was 45% of consumers stated an increase in willingness to use mobile contactless payments if retailers and banks helped them understand the security benefits of using something like Apple Pay, Android Pay, or Samsung Pay. This was listed as the single biggest thing retailers and banks could do to get them to use mobile contactless payments.

As I analyzed the data of over 50 questions between all three markets and the responses of 1,761 consumers, I’m convinced as ever mobile payments are the future. As more banks support it, merchants accept it, and consumers understand the security benefits, I’m convinced we will get to an era where paying with our smartphones is the normal and most common behavior. However, our research strongly suggests it is not consumers standing in the way of adoption. It is retailers and banks who need to make the appropriate moves to bring this safer and more secure way to pay to their customers.

I’ll be presenting the full findings of our research at a VIP event hosted by NXP in Las Vegas on October 24th. If you are coming to Money 20/20 or are a VIP in the banking and transaction industry, or media, let me know if you would like to attend.

The news has been aflutter this week with announcements by both Comcast and Charter that they plan to enter the wireless business as Mobile Virtual Network Operators (MVNOs). For the wireless historians among us, this is cable’s third run at the wireless business over a 20-year span.

The question is, do Comcast and Charter have a chance in an already competitive and saturated wireless market? Well-respected equity research analysts at New Street Research have looked at this in depth and concluded cable could capture some 10% or more of the wireless market. I see some important hurdles and am a little less optimistic.

The idea of a Wi-Fi centric MVNO is to offer a less expensive plan by offloading a significant amount of traffic from the cellular network. Voice, texts, and data default to Wi-Fi, with cellular acting as a ‘backup’. Cable’s particular advantage is the millions of private and public Wi-Fi hotspots they have deployed over the past several years as part of the “Cable Wi-Fi” initiative. In Comcast’s case, there are some 15 million hotspots, including residential access points broadcasting a second, ‘public’ SSID. They have also deployed a core network to support residential and business fixed line telephony service. Their ‘Wi-First’ service, as I call it, would theoretically deliver attractive margins for their wireless business. Adding wireless as part of the bundle that includes broadband, pay TV, and even fixed line phones, makes for a compelling value proposition, in their view.

Now, this is not the first attempt at a Wi-Fi centric MVNO. Republic Wireless and Google’s Project Fi are the two leaders in the United States, with one million or so subscribers between them, according to our estimates. There have also been some failures, notably Scratch Wireless and Cablevision’s Wi-Fi only Freewheel service.

There has been substantial progress in the Wi-First experience over the past couple of years. Republic Wireless has developed a lot of intellectual property around the idea of “Adaptive Coverage”, which dynamically and seamlessly switches between cellular and Wi-Fi, even on the same call, always searching for the optimal signal. Google’s principal and important contribution with Project Fi is the ability to dynamically choose the best connection between Sprint and T-Mobile (its MVNO partners), in addition to Wi-Fi. Work done by the cellular operators on Wi-Fi Calling and VoLTE have also made Wi-Fi more viable.

Cable’s prospects in wireless come down to five fundamental questions, in my view.

1. Progress on Usability

Cable has its work cut out for it if they plan on leveraging Wi-Fi hotspots into a quality wireless service. The “Cable Wi-Fi” experience, which leverages indoor and outdoor hotspots to provide subscribers with Wi-Fi coverage outside the home, has been fraught with usability challenges. My personal experience (and that of many others I’ve talked to) with Xfinity Wi-Fi is that the phone automatically attaches to any Xfinity hotspot it sees, even if the signal is weak or the AP is functioning poorly, often resulting in a service that simply doesn’t work on cellular or Wi-Fi, with the added insult of draining the battery. Heard of ‘airplane mode’? I call this ‘purgatory mode’. In fact, many customers say they’re forced to turn off Wi-Fi when outside the home so their phone doesn’t get stuck on a cable Wi-Fi access point.

I wrote about this issue two years ago and, unfortunately, I have seen little progress. Since this is a feature the cable companies provide for free to their broadband subscribers, it isn’t mission-critical. But if they’re going to start charging $30 or more a month for an add-on wireless service, significant improvements need to be made on usability.

2. iPhone Must Be Part of the Offer

Wi-First services have historically been available on a limited number of purpose-built Android devices. This has started to change as a result of the evolution of the Android OS. Most newer Android phones can now support Wi-First services without a lot of custom configuration, which has led to an expansion of device choices from companies such as Republic Wireless.

The elephant in the room, however, is iPhone. Historically, Apple has chosen not to support Wi-First services and does not provide the equivalent configuration tools as the Android crowd. I believe any cable company foray into wireless must support iPhone. It might not be necessary for a niche player such as Republic but, if you’re the cable guy, you’ve gotta support the device that commands nearly 50% of the U.S. smartphone market. The good news is Apple does not have to do anything particularly special to support, say, a Comcast wireless service. This is not a Brian Roberts-Tim Cook level discussion. However, there are lots of things Apple could do to make the service work better, from a usability and subscriber experience perspective, on the scale of what Apple and T-Mobile have done to make Wi-Fi calling a good experience. Additionally, I’d imagine that, since cable has little retail presence, they might rely on Apple for distribution to a certain extent.

3. Is the Business Model Viable?

Do not expect a deeply discounted wireless service from your cable company. Much as subscribers might like to complain about the cost of their wireless service, per-gigabyte data prices have come down markedly over the past three years. $40-50 basically gets you unlimited voice & text, plus a substantial chunk of data. And $35-40 gets you a pretty competitive pre-paid plan. It’s hard to see cable undercutting that substantially. Yes, their goal is to have some 75% of traffic on Wi-Fi, which would provide for a less expensive offering. But even though they have an MVNO deal with Verizon, that doesn’t necessarily mean they’re getting fantastic wholesale pricing. So any substantial data usage on the cellular network will come at a premium.

Roaming is another issue. Remember that cable companies, despite their size, are still regional players. Does Comcast want to support heavy out of market use on cellular?

Another pro-cable argument is that, even if wireless is a break-even proposition or a loss leader, it’s part of a larger bundle, which contributes to long-term subscriber value, especially in an era of declining margins for pay TV. I get that. The question is whether wireless is ‘worth the trouble’ as a bundle add-on if it’s not successful as a standalone business.

4. Why Would A Subscriber Switch to Cable?

I think it is going to be tougher for the cable companies to get subscribers to switch than they think. Postpaid wireless industry churn is already in the 1% range, in a competitive four carrier market. We’ve already established that cable wireless services aren’t likely to be deeply discounted. Also under-recognized is the fact that some 50% of U.S. wireless subscribers are on some sort of family or shared usage plan, many of whom are also enmeshed in some form of equipment installment plan, with upgrade opportunities and aggressive promotional offers around iconic device launches. This all makes it tougher to get customers to switch to a company that, let’s face it, they don’t exactly love.

Content could be another form of differentiation. One could certainly see a situation where a cable subscriber can get TV content extended to mobile devices, as part of their service plan. Comcast especially, with its NBC Universal and other content assets, could put some pretty compelling packages together.

The fact is, however, that a lot of this already exists in the industry. Comcast subscribers can already get a fair chunk of content on mobile, through the excellent Xfinity app. They can even download DVR content for offline viewing. AT&T is already being aggressive in this domain, offering unlimited data plans to subscribers who have both AT&T and DirecTV, and zero-rating DirecTV content for AT&T subscribers. Cable companies will have a hard time competing with zero rating or unlimited data plans on cellular, since they don’t own their own network. So it’s hard to see a truly unique value proposition related to content as part of an MVNO.

One opportunity in cable’s court is value-added services. Their IMS core and role in fixed telephony provides the basis for some potentially compelling rich communications services involving wireless. I could see small business being a target here.

5. What About Successes in Europe?

There have been several successful Wi-First forays by cable companies in Europe. I’d argue it’s different here. First, most of Europe’s cities have a high population density, making them easier to cover with Wi-Fi. Second, because of the SIM-centric culture there, switching between providers with the same phone is more fluid. Third, wireless services are more expensive, which improves the Wi-First value proposition. And fourth, we consume a lot more data on cellular, which affects the economics.

A final wildcard is whether the cable entry into wireless is predicated upon eventually having their own network of some sort. Comcast is participating in the 600 MHz auction, so there’s that. There’s a lot of activity in the unlicensed band (LTE-U, MulteFire, etc.), which will result in more seamless cellular/Wi-Fi services over time. There’s also a chance cablecos could be involved in some sort of consolidation involving Sprint and T-Mobile, as has long been speculated.

I am more optimistic cable could play a role with at least a partial facilities-based network. They would have more control over pricing, handset relationships, and distribution. Their other assets would be a greater value-add. So, perhaps a limited scale MVNO is an important first step.

Monday presented us with an interesting juxtaposition: Facebook Messenger head David Marcus spoke at TechCrunch Disrupt and said their initial vision for bots was overhyped, and Apple opened up the iMessage App Store in preparation for the release of iOS 10 on Tuesday. The response to these two message-centric initiatives is illustrative of the challenges inherent in attempting to replace the existing app model versus merely evolving it.

Facebook’s bot vision gets a reboot

Facebook announced bots for Messenger at F8 earlier this year and tapped into what was then a lot of hype about bots as a possible replacement for apps, especially when taken together with Microsoft’s “Communication-as-a-Platform” announcements. But at TechCrunch Disrupt, David Marcus said the following (I’ve transcribed these from the event video, and edited it slightly in the process):

When you want to build an ecosystem, and bring a lot of developers to the platform and bring users to the platform, and at the same time reinvent the user experience, it takes a lot of time… We have over 34,000 developers on the platform, and they’re building either capabilities for third parties or actual experiences. The problem was that it got overhyped very quickly, and the experiences weren’t able to replace traditional apps. What we’ve done in the last couple of months is that we’ve invested in additional capabilities and provided a lot of guidance to developers on how to create successful experiences.

The fundamental problem Facebook faced in launching its Messenger bot strategy was it was pitching it as a replacement for apps but it simply wasn’t ready (something I wrote about at the time). The interfaces didn’t allow for complex interactions and, therefore, were unable to substitute for many of the things people use apps for. Part of the problem is the oversimplification of how bots are often described in the West in relation to how messaging has absorbed app functionality in Asia – major Asian messaging apps incorporate web views and many other app interface elements in a way Messenger’s bots interfaces simply didn’t. Leaving aside the cultural and historical differences between these markets, Facebook wasn’t even using the same elements to achieve the same results. It’s clear from Marcus’s remarks this week that Facebook understands this and the new version of the bot platform incorporates web views and other elements necessary to make these interfaces more functional. But what this ends up doing isn’t so much replacing the app model as recreating it within the context of messaging. That’s worked for many interactions in Asia and maybe it still will here, but that’s a far cry from the original vision of conversational user interfaces alone replacing apps.

That didn’t prevent developers from building on the platform. In the quote above, Marcus cites 34,000 developers who have done so, although not all have actually created bots. But the success, as Marcus also noted later in his remarks, has been limited to certain verticals, notably news.

iMessage apps get going with a bang

By contrast, Apple announced its updated iMessage platform at WWDC in June and this week we saw the launch of the iMessage App Store and iOS 10, making these features available to users. I have my iPhone set to update my apps automatically and generally ensure that updates happen every day. On Tuesday, I had over 40 apps with updates, the vast majority of which were iOS 10-related. Many of those in turn adding functionality to Messenger. Games now have sticker packs for iMessage, payment apps were making themselves available within both iMessage and Siri, and apps from IMDB to Evernote were providing extensions for iMessage to allow their content to be more easily shared. In the time since then, I’ve seen even more apps go down the same route and a quick glance at the App Store suggests there are many other apps from big names jumping on the iMessage bandwagon.

What’s critical here is Apple isn’t trying to replace apps with its iMessage platform, but rather is extending those apps into new parts of the operating system, outside of their app icons. And because it isn’t promising to substitute for apps, it has many more developers on board because it’s not asking developers to build for an entirely new platform but merely to leverage the work they’ve already done and the user bases they’ve already built. I’ve written previously about how much Apple has asked of app developers over recent years with a combination of new hardware and big new features for its major operating systems but, despite all that, these developers seem to see value in building new functionality for their apps to be available in Siri, iMessage, and Maps.

Apple’s vision is much more in keeping with how users want to engage with messaging in Western markets, while also embracing some elements of how Asian messaging apps are used with features like stickers. As a result, I’d argue it’s seen a lot more success than Facebook with its bot-driven vision. I’ve no doubt the enhancements to Facebook’s bot platform will drive more interest from developers but, at this point, developers can choose whether to extend existing apps into iMessage, and thus tap into the most lucrative base of smartphone customers in the world, or to start from scratch with a bot strategy within Facebook Messenger, with little evidence that bot strategy is working.