Category Archives: Uberization

Apple, Book references, Disruption, Innovation, Uberization

[Book Review] The Innovator’s Dilemma

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The Innovator’s Dilemma is an innovation classics, having defined the term of disruption and made Clayton Christensen famous. It is not only a recommended reading, must also a recommended re-reading. A lot has happened since it was published in 1997, and although it has been heavily criticised since then, I find it still relevant in most situations. Obviously management science is no deterministic science, and no theory covers all cases flawlessly. But the disruption theory applies to many domains pro-actively, which makes it incredibly relevant. Note that I read the 1997 version, and other, more modern editions might have tried to broaden the scope of disruption — but I’ll stick to the original “Eureka” version.

In short…

There are countless summaries of their book on the Internet, so I’ll stick to my own take-aways:

  • Disruption is powerful, in that well-managed companies fall in the trap of getting trapped in a high-end niche when trying to best serve customers and optimise resource allocation.
  • Disruption happens when a cheaper alternative, albeit with lower performance, appears on the market. It first requires to look for alternative applications and customers that installed players overlook. But the performance increases faster than the customers’ needs, and ultimately the cheap alternative becomes good enough for the mainstream market. Having matured to something that the incumbent can no longer reproduce easily, they end up… well, disrupted.
  • Strategies to resist disruption require a separate organisation that grows independently: mainstream resource allocation would systematically priorize other projects for existing customers, and the disrupting products cannot initially promise significant revenue generation for a corporate behemoth.  It needs to work like a start-up.
  • Ultimately, when the disrupting product becomes good enough for the mainstream, the choice criteria change. For example, once hard drive all become reliable enough for most applications, other factors might become more important in customer choice, such as price/MB or speed.
  • There are interesting numbers about gross margins in a given “Value Network” (i.e. stakeholders of a value chain), inferring that partners’ margins are heavily structured by their other partners’ own margins. Good to know before exploring new markets (or “just follow the money”, as they say…).

Afterthoughts

Although incredibly useful, this book does not predict the future: it just explains what happens in case of disruption, and give directions on how to manage a corporation successfully to survive disruption. However, it cannot predict when a new technology is disruptive. Let’s list a few randomly-chosen examples:

  • Video streaming: once low-quality and missing content, now Netflix is disrupting TV. One can see how hard it will be for TV channels to catch up, having failed to defend their fortress.
  • Low-power wide-area Networks: LoRa or SIGFOX propose very low-bandwidth, low-power wireless networks with very low cost structure. Today, these networks are find for certain IoT use cases, but they are far from supporting e.g. a phone call,. However, with technology advances, why not imagine them suitable for mid-rate data transfer ? Then it would be disruptive for existing, more traditional networks.
  • Digital cameras: bridge cameras are becoming higher-end, lower volume products, while smartphone cameras are taking over. A clear case predicted by the theory: the lower-quality tech is getting good enough for mainstream, taking volumes away from traditional players, which are flying to quality.
  • Presentation remotes: some people spend up to $80 for a presentation remote. But there are mobile apps that allow to change slides and perform other simple tasks such as timing the presentation. While far inferior in ease of use or features than a traditional remote, these apps are… free ! Definitely a candidate for disruption, provided there is a business model for these apps.

One more thing…

As strange as it sounds, the original iPhone was not a disruption, according to this book. The iPhone was not any cheaper than then-existing smartphones, but was simply superior in term of user experience (reminder: the first version was lacking MMS or 3G, which Nokia phones had had for a long time). So, disruption is not the only way to gain market share. Blue Ocean Strategies, anyone ?

Apple, Digital, Disruption, Telecom, Uberization

How can MNOs deal with the Apple SIM

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This has been barely noticed during the last Apple keynote, but the next wave of iPhone 6s will feature an optional monthly plan to pay for the device. Apple has massive amounts of cash out of the US, which it is not in a hurry to repatriate, so it clearly has the deep pockets for such a strategy globally. All this will come with something already seen on the last iPad: the Apple SIM. Now that Apple is taking over the distribution of mobile subscriptions, Mobile Network Operators (MNO) may rightfully feel threatened to be dwarfed into a last mile provider, while Apple rips the profits of distributing mobile plans. But this is not a done deal: there are ways that MNO may fight back. So, how can MNOs deal with the Apple SIM ? Here are a few ways to explore.

What is the Apple SIM ?

Before moving forward on this topic, let’s be more specific about what we are talking about. The Apple SIM is nothing new conceptually, at it operates like a technology called eUICC — all on a standard SIM package. eUICC is fully standardized by the GSM Association, and sold by leading vendors such as Gemalto.

In short, the eUICC technology allows for reconfigurable SIM cards with the help of cloud technologies. You may know that your SIM card embeds the private crypto-key of your mobile provider — one that allow to uniquely identify you on the network. On a traditional SIM, this private key is hardware-coded on a chip, which is a highly secure way to distribute it in millions of SIM while still keeping it unreadable (the way the key is used in mobile auth protocols is beyond this article).

In the case of the eUICC, an entity called “service manager” securely and remotely pilots the private key in use inside the chip. This allows two nice features:

  • the MNO can be reconfigured in your device remotely, without any physical interaction;
  • once this tech is widely accepted by MNO, you actually don’t need a SIM card anymore: an eUICC module could be soldered anywhere on your phone’s motherboard — which saves space and makes design more simple.

In the Apple SIM, as you may have guessed, Apple is the service manager of the SIM, and the MNOs are back to their main role in the chain: mobile service providers.

Why eUICC is a big deal for MNOs ?

Mind you, Mobile Network Operators already use the eUICC technology: in M2M applications, where you need global coverage for thousands of devices scattered all over the country, including in rural areas, it could be nice to get coverage from just the telco that’s there. Some connected electricity counters, for example, may be reconfigured to connect to the network with the best signal wherever it stands, without having to manage a stock of SIM cards and manually insert them on the field. It was also chosen by the EU in its connected car recommendation. Actually, all the main MNOs have signed up for the eUICC standard by the GSMA.

What MNOs are worried about is the use of eUICC in the B2C space, because it is disrupting the distribution of the mobile plans. There are two issues at stake here:

  1. Telcos have traditionally developed an extensive retail distribution network through a large number of self-branded stores, which are either self-owned or franchises — and they are turning useless;
  2. A service manager with significant market power might extract more value than what MNOs currently pay for acquiring customers. Apple might fall in that category, as it “owns” the premium segment (80% market share for devices above $300). Apple also showed in the past that it is not scared to impose stringent conditions on telcos that just want to distribute its phones (although it hurt its competitors more than the telcos actually).

The end of MNO retail stores

Sure, the eUICC makes the retail store irrelevant, as distribution happens online (through a portal managed by the service manager). But as it stands, the store is already largely irrelevant in mobile distribution, for at least four reasons:

  • Online stores are already on the rise, if only for price comparison. You may still buy your SIM in the store because you don’t want to wait for delivery, but you choose your offer online anyway. In many developed countries, the customer does not buy a phone plan, it buys a mobile device with a consumer credit. Find the best offer online, and the store no longer “sells” you anything, it is just part of the logistic chain.
  • MNO stores were once relevant when offers where complicated and people did not know how to insert a SIM in their phones. But it turns out that complexity have decreased and customers have become more tech-savvy. This makes the store pretty much useless on two of its main missions.
  • In many mature markets, prices declined sharply, which leaves less money to pay for a brick&mortar distribution channel. A retailer used to make up to €250 for acquiring a new customer with a 2-year commitment. This is no longer possible when unlimited (unsubsidized) plans run at €20/month, as is the case in some countries. Add a subsidy worth €20/mo, and pay the distributor the equivalent of €10/mo for a 2-year commitment, and it sells for €50/mo instead of €20/mo. When you are 2.5x times more expensive than the standard offer, you are targeting a niche, at best. Most likely, irrelevance is at the doorstep.
  • In many countries, the market share of plans without commitment have increased drastically. For example, in France, 2/3 plans are not under commitment any more — up 100% in the last few years. Although one clear driver
    has been competition and the launch of a 4th MNO, it is also the result of a longer lifetime of the smartphone. The following chart by mixpanel.com shows that iPhone 4/4s/5, launched 3 to 5 years ago, still account for roughly 40% of users in the US. With a churn rate of 30-35% in pospaid, this confirms that people now change plans more often than devices.
iPhone mix 2014
Evolution of iPhone mix in App user base. source: mixpanel.com

In brief, it is fair to say that the lower utility factor of MNO stores is not a result of the eUICC, but rather the logical result of endogenous factors. The danger of eUICC is that the irrelevancy of retail stores is brutally translated in facts: nobody needs to get a SIM in the store anymore. Plus, should customers want to remain in brick&mortar channels, why would they tie themselves to one single MNO brand ? It used to be for the subsidy, but if this can be had from the device manufacturer, why bother ?

Focus on the customer, not the channel

The main recommendation to MNO is not to fight the eUICC tidewave, but rather to embrace an “adopt and adapt” strategy:

  • MNO need to rethink their retail strategy. Customers no longer need these stores as such, therefore they should either find another “raison d’être”, or prepare to close them altogether. New missions could be to service defect phones, sell used/reconditioned devices, solve specific customer problems as a differentiator, etc. All this requires different skills than what’s currently in place.  But without proper repositioning, MNO should start shortening lease agreements, sell stores to franchisees, and stop operating retail stores altogether.
  • MNO need to work on the best way to acquire customers on the eUICC’s service manager portals. There is clearly an opportunity to work with Apple on this, as this would legitimate its technology. MNO need to define the most attractive offers (subsidy or price ? / Unlimited vs segmentation, etc.) and marketing strategies for this channel.
  • MNO need to focus fully on customer satisfaction, and upsell ! Although Apple can influence the choice of a carrier, it does not control which plan is used at any given time by a user. If the MNO sells a low-cost plan at first, it could increase its margin by converting the user to a higher-end tier. The example of FreedomPop in the US is striking, as it is able to convert a large number of freemium customers to a paid offer by optimizing its communication to the enrolled users. MNO should allow self-configuration through an easy application on the device to combine unlimited usage and budget control.

All in all, the best way to shine in the eUICC world is to be desired by the customer. This, Apple cannot fight, or at its own expense. MNO can shield themselves against abuse of power from Apple by learning to use this new distribution channel fully, instead of entering a dogmatic war against it — which at the end is a war against the user’s experience.

As Apple will start to subsidize its own devices, MNO should anticipate the associated extra cash flow — as they will subsidize less devices. Up to them to invest in customer experience, or to take the short-sighted path of exceptional dividends…

Society, Uberization

My problem with Uber — and its detractors.

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It might not be politically correct to say this in the innovation community, but I have two problems with Uber:

  • it is no longer an innovative company, but it became an unethical corporation with deep pockets.
  • its detractors do nothing to be constructive against Uber, just opposing the old, established world against the digital tide-wave.

Uber is no longer driving innovation — but chose to adopt predatory behavior.

Now let me get more precise: Uber is no longer innovative. I mean, really. Truth be told, it takes just around $2M of founding to start a Uber look-alike. Granted, Uber set the way, but most cities now have many Uber competitors beyond taxis. So no, it is not rocket-science anymore.

With that said, how can Uber be the most valued (i.e. expensive) unicorn ? It raised a total of $5.9 Billions, the last round reportedly valuing the company at over $40B. That’s a lot of money, for a company that seems to lose as much as it has revenues. Uber’s promise may be about self-driving cars and (probably) fully-robotized last-mile parcel logistics. But nothing to be happening for the next 10 years or so, given regulatory and social barriers to launch such services. Meanwhile, the company’s main asset is… its brand: therefore it does everything to install it, including by extensive use of unethical, and sometimes illegal, business techniques:

  • In some countries, where UberPoP was declared illegal, it keeps the service running no matter what, even paying for the fines of drivers being caught (which is also illegal).
  • In other countries, it traps the drivers of competing services to either recruit them at higher rates (remember Uber is non profitable already?), or just to generate a no-show.
  • It goes as far as making battles personal, where mayors bar the service from their city.

Examples like this are plenty. There is even a wikipedia page about it. So let me repeat it: Uber is not about innovation anymore, but about predatory behavior to preempt markets at a loss. I would not want to be a shareholder, unless relying on the greater fool theory.

The debate is about a new way to organize labor.

Now let’s not be mistaken, even blinded by all the reproaches that Uber gets or deserves. For it has one great merit, which is to open a new, necessary debate about how the digital revolution changes our labor organization.

In most developed economies, the industrial revolution introduced a new relationship between the those running the business (“the employer“), and the person actually getting things done (“the employee“). This relationship is generally established with a work contract and, depending on the country, union agreements and/or labor law. It materializes with institutions running this system.

With Uber, as with many examples of the collaborative economy (e.g. AirBnB…), the market built towards filling a need is shifted out of social institutions’ control. There is a price effect to that phenomenon: social institutions have a cost and, by short-cutting those, these services acquire a price advantage which is not about creating value, but about refusing to pay for social institutions. Beyond Uber’s great UX, there is social arbitrage at play.

As a result, it is logical that Uber, arguably being the most aggressive new entrant, is becoming a part of the next US presidential campaign: can society accept a company which provides a great service, in the consumer’s interest, but shows no single sign of Social Responsibility? Indeed, how can companies pretend to do good, when they all optimize their tax scheme so that they don’t pay for schools or hospitals? Answering this question is far beyond the scope of this blog, but this leads to the second problem stated in this article: Uber’s detractors are no more constructive.

Uber and its detractors need to co-design the new world

Detractors of Uber are generally those directly threatened by its activities: taxi drivers (in many countries a rent situation), but also social institution financed by the existing work contract momentum — health insurances, retirement administrations, etc. All these have financial liabilities only viable if workers pay their taxes. Governments sometimes clearly sided with them.

Problem is, these detractors have sometimes fought against Uber to defend the existing momentum. This is doomed to failure, as institutions never win against mass adoption by the people. This is all the more surprising, that in the past institutions have evolved against new services:

  • Copyright holders found a way to deal with Youtube, making the service fully legal (remember when this was not the case?) in most western countries.
  • AirBnB agreed to pay the same taxes as hotels in France, and no one pretends that it should be illegal.
  • BlablaCar, also in the transportation industry, made sure that its drivers could not turn a profit with the service.

Now, maybe Uber likes this situation, where paying fines is seen as a cost of doing business, and a convenient barrier-to-entry for its competitors. But it is time to sit at the negotiation table and find a sane and sustainable way to conduct business. Unless Uber can introduce driverless cars fast enough.