There are conflicting reports on the progress of the mobile operators’ Isis project to provide mobile/NFC transaction processing in competition with credit cards. Some of the media are saying that the initial link with Discovery for the actual transaction handling was an error in judgment, and the operators themselves admit that merchants say that Visa and MasterCard and even Amex are more likely to be presented by consumers. Does this mean Apple and Google win in NFC? Did the telcos screw up here, or is there something deeper going wrong, or perhaps is nothing wrong at all? All of the above, sort of.
Visa and the other giants in the space have facilities to collect and clear the transactions made through credit cards, and this is a high-cash-flow, low-margin business that requires a lot of build-out and a lot of retail presence to get started with. The telcos have neither, and Google and Apple likewise have none. The perception of everyone (especially Apple and Google) is that they can’t become players in the transaction processing space—the return on capital is way too low. Discovery was the one that wanted to deal in order to drive up their own usage. But merchants and consumers wanted broader participation, and that means trying to do deals with virtually all the credit card processors.
AT&T is taking another tack in the service layer with a Groupon-like daily deals and LBS shopping alerts. Like the Isis notion, this would provide the company with service-layer revenue to offset the cost of creating identity-and-transaction infrastructure. There are also rumors that the telcos might sweep up some hosting companies the way they’ve swept up cloud providers. I think that’s a reasonable guess, but not because they need the servers. Telcos know that they can provide better IT economy of scale off future service-layer IT deployments than any cloud or hosting vendor could. What they want is the customer base. Whatever the return on server investment for hosting/cloud companies might be today, it’s high compared with a telco ROI. Add to that the fact that the telcos could create the same hosting service at a lower base cost and you get a pretty nice profit picture.
The growing and more visible interest of telcos and cablecos in the service layer is creating some fear and uncertainty among the OTT players. Netflix, whose delivery model adds to operator costs while competing with operator TV strategies, is saying that they don’t want to see the telcos hurt. As well they shouldn’t, but it may be too late at this point. With revenue per bit declining, there’s nowhere to go but up in a service sense, and that means more competing with OTTs. It also means more spending on the service layer and less on the network, and more focus on integration of services with the network as a strategic differentiator in both services and networks, capex-wise.
We’re also seeing some indications that regulators are worried about the impact of Internet content on media diversity. In Australia, regulators are asking for submissions on policy responses to media convergence. The question is whether it’s possible to sustain local perspectives and minority viewpoints when everyone has access to a market model that includes giant pools of consumption like the US. Would content producers in Australia start focusing on material that’s more international in nature because they can earn more? What then happens to local content? Can local TV stations run only local news, and if they try will advertising pay to keep the lights on? Good questions.
There’s some bad economic news today, relating to employment. After lackluster private-sector job growth reported yesterday, we now get the news that new claims for unemployment surged this week. A weekly report isn’t definitive; we need to see the longer-term monthly numbers to get a true perspective. Nevertheless, there’s a risk that employers are curtailing hiring again in order to promote profits when revenue growth is soft or non-existent. That would likely erode the level of economic growth. In Europe, a similar trend would hurt the financial stability of weaker economies with strong social programs, and that could put the Eurozone back into a state of tension over sovereign debt. We’ll have to watch developments here carefully.