What is the hype in Groupon (group-buying local daily coupon offers)?

Launched in November 2008, Groupon features a daily deal on the best stuff to do, see, eat, and buy in a variety of cities across the U.S., Canada, Europe and soon beyond. They have more than 300 people working in their Chicago headquarters, a growing office in Palo Alto, CA, as well as local account executives in many cities. How Groupon obtained $500M in revenues in two years and a valuation around $3-4 billion (according to rumours of acquisitions by Yahoo or Google)?

According to LA Times:

“A new breed of coupons — zapped daily to consumers' e-mail accounts and offering local deals for spa treatments, restaurants, yoga classes, hot-air balloon rides, stores and even Botox — has transformed the dowdy discounts into a social media phenomenon that's attracting a new generation of fans. The savings are eye-popping: 50% to 90% off is typical. But there's a catch. If you want that $40 mani-pedi for 15 bucks, you'll have to pay upfront with a credit card and you'll have to move fast. The chance to snag one of these vouchers usually lasts no more than 24 hours (though merchants will honor them for weeks or months).

Bargain-hungry shoppers are hooked. "Daily deals" websites including Groupon, LivingSocial and Screamin Daily Deals have attracted millions of users, a lot of them young, urban and tech-savvy. Many say they love the excitement of waking up in the morning, checking the latest deal online and deliberating with friends on Facebook or Twitter about whether to buy — all while the clock ticks down... The daily deals phenomenon "is a rocket ship unlike anything we've probably seen in consumer shopping online," said Brad Wilson, a discounts expert and founder of BradsDeals.com. "It's brilliant... Wilson said he's betting that the trend will survive the economic downturn, in part because consumers simply can't resist the allure of a bargain. "There's such a compulsion to it," he said. "People end up spending more than they intended in the excitement of the countdown of that day."

http://www.latimes.com/business/la-fi-groupon-christmas-20101026,0,2667542.story

Launched two years ago, Groupon is now the leader in this sector. It really takes off over the past year. Groupon offers a way to get important discounts while discovering fun activities in your city. Their daily deals consist of restaurants, spas,massages, theaters, hotels, and a whole lot more, in dozens of cities across the US and Canada. It recently acquired firms outside the USA for expansion.

Yahoo made it known to Groupon executives and backers that it was willing to pay as much as $3 billion to $4 billion to acquire the company. Besides Yahoo, other potential Groupon suitors include Amazon, Google, and eBay. The company is deciding between an eventual IPO, opening itself to acquisition talks with bigger companies, or raising more capital. Last week, Bloomberg reported that Groupon is looking to raise money at a $3 billion valuation. Groupon raised $135 million at a valuation above one billion dollars in April. The company currently has 3,000 employees serving markets in 29 countries. Internally, it is believed to be "many, many multiples larger" than its nearest competitor, LivingSocial.

Read more:
http://www.businessinsider.com/yahoo-hints-at-3-billion-offer-for-groupon-2010-11

However, Living Social continues to nip at the heel of Groupon; last month, it actually had more unique visitors than the coupon giant. The company currently has 10 million subscribers in the U.S., Canada, Britain and Ireland — said it has saved consumers more than $100 million this year.

Businesses not only have to offer deep discounts but also must give the daily deals websites a big chunk of those sales: A 50-50 split is typical. 


According to Business Insider here are the main reasons for Yahoo to acquire Groupon:

“Yahoo's most valuable assets is its HUGE lead in email. Unfortunately for Big Purple, the the once-fast growing business it has developed with that traffic – brand advertising – is starting to slow. So how would buying Groupon help? Groupon makes ALL of its money ($400 million this year?) sending mostly local coupons to its users' email inboxes. Its biggest cost is user-acquisition – buying its way into inboxes. If Yahoo were to buy Groupon, it would eliminate Groupon's biggest cost AND increase its subscriber base to over 100 million people. Cha-ching!

The kicker? Yahoo is ALREADY making money off Groupon ads in its inbox. See the screenshot of my Yahoo Mail inbox below. But instead of reaping Groupon's huge margins, Yahoo is just collecting mediocre CPMs for lousy email banner ads. Worse, it doesn't have any relationships with the local businesses fueling Groupon's spending.”

Read more: http://www.businessinsider.com/heres-why-yahoo-wants-to-buy-groupon-2010-10#ixzz15Ycr50fv

Thus, Yahoo’s M&A Strategy could focus on Local Commerce Rather Than Content.

Industry outlook

“Right now, Groupon-style group buying is more or less just coupons that get sent to you via email to entice you to sign up. What if you could look at a real-time, auction-style exchange of local offers from merchants or retailers or restaurants in your vicinity — maybe even on your mobile device — and pick the offer you wanted for dinner that evening? You can’t do that now, but that’s one vision of where the local group-buying phenomenon is headed in the future, according to Don Rainey, a partner with Grotech Ventures and an investor in LivingSocial, the number two player in the U.S. group-buying market next to Groupon. Rainey said he sees a day when merchants and potential customers interact through a kind of real-time exchange — like a stock exchange, with buyers and sellers, but for local offers on meals or other goods. “I can see local retailers and consumers bidding in a real-time system for where that consumer is going to go for dinner,” says Rainey. If a merchant is having a slow night, they can put an offer into the system and users can choose between that and multiple other offers, based on location and the time they want to go out. As someone who is constantly looking for new options for places to eat in my local area, this sounds like a winner to me.

Groupon gets all the press when it comes to group buying, primarily because it’s the largest player in that market by far; it has raised more than $165 million in venture financing and has sales that are approaching $500 million. However, LivingSocial is a strong number two in that expanding space, and in some regional markets, it’s a larger player than Groupon, according to Rainey. “

Source: http://gigaom.com/2010/10/27/livingsocial-and-the-future-of-local-group-buying/

One important value added brought by group-buying coupons is that some small and medium businesses who could not afford a decent advertising budget, can now do it for a very small percentage of what it costs before via print, radio or TV.

Recently, Amazon is looking to invest around $100M in Living Social the main competitor of Groupon, which has around the same number of daily visitors on its website.

A big potential resides in the connection between mobile and social networks.  Daily mobile alerts, which can be personalised to customers, would bring value added to both consumers who can make targeted very interesting deals, and retailers who can reach more "offers-friendly" customers. 

Louis Rhéaume

Infocom Intelligence

louis@infocomintelligence.com

What 2 of the best Venture capitalists are saying on the future of the Internet ?

http://www.youtube.com/watch?v=nBvuirDPHKA&feature=player_embedded

Last week, 2 of the best Tech VC (venture capitalist) gave their perspective on the Internet for the Web 2.0 Techcrunch summit.  John Doerr of Kleiner Perkins, the man behind the success of Netscape, Facebook and Google just to name a few; and Fred Wilson of Union Square Ventures who made the deal of Zynga made very interesting remarks on the future of the Internet.

For Wilson, we are in the middle of a second Internet stock market bubble.  I agree with him, but I think we are at the beginning (see post http://infocomanalysis.blogspot.com/2010/10/are-we-entering-in-second-internet.html). For Doerr we are just in a boom period of a third waves of value creation and innovation about Internet.  For Wilson, tech VC firms are seeing a lot of firms which copy the strategy of others.  Thus, there are a lot right now of "Me too" business models.  For instance, a lot of firms try to copy the success of  Groupon in local daily social networks deals.  It is similar to what happened in telephony in the 1990's where CLECS (Competitive Local Exchanges Carriers) had almost all the same strategy and business models.  The vast majority went in bankruptcy following the burst of the 2000 tech stock bubble.

According to Wilson only 10% of firms in a VC portfolio should go public, the best ones only.  The rest  should try to sell  to others firms.

For Doerr, the Silicon Valley is still the place where important Internet platforms still emerge and grow.  For him, it has never been a better time to start a tech firm than today.  Valuations are high and VC money is largely available.

For Wilson, a very hot sector right now is the combination between mobile and social networks.  One can think of the potential of Twitter and Groupon for instance in this sector.  He adds that Android will become the dominant platform on mobile because of its open standard platform versus Apple and Research in Motion (RIM and its Blackberry).  Application developpers can create more easily value on this platform.  Wilson proposes that Apple is like the "cable providers" business model of mobile Internet.

Doerr suggests that Facebook, is the strongest firm on execution of the Internet with Google, Apple, and Amazon.

Wilson suggests that Facebook did not create much innovation.  Furthermore, the only complementor of its platform, which created a lot of value is Zynga. He also suggests that Google is the best tech acquirer since a decade.

John Doerr had the final word.  He cited Colin Powell who said: "Innovation without execution is hallucination".

Louis Rhéaume
Infocom Intelligence
louis@infocomintelligence.com

What is the potential of Research in Motion (RIM.TO)?

In mobile platforms all the hype actually is on Apple and Android (Google).  Their market shares are rising quickly in the US.   For the CEO of Apple Steve Jobs, ““We’ve now past RIM, and I don’t see them catching up to us in the near future.”

Balsillie co-CEO of RIM answered: ” The implication being that RIM practically invented the smartphone category and is not going anywhere.”

RIM has a different attitude toward web apps than Apple. There may be 300,000 apps for the iPhone and iPad, but according to RIM CEO, the only app you really need is the browser. “You don’t need an app for the Web,” he says, and that is equally true for the mobile Web. Blackberry is betting heavily on the Web, similarly to Google.

Positive aspects:

-New RIM mobile ad network :  good potential.

-New potential of Playbook blackberry tablet; cheaper than the iPad, but 3 to 4 times faster than the iPad. It will be launch at the beginning of 2011 and support Flash applications.

-Potential in new emerging markets: RIM smartphones are better value with BB messenger : free real-time SMS and lower cost of smartphone.  In Latin America and several part of the globe, the majority of users are prepaid users who can’t benefit from subsidies on the smartphone or from  long-term contract.

-Mary Meeker: Smartphones Will Surpass PC Shipments In Two Years.

Negative aspects:

-RIM position on development of apps.   For co-CEO Balsillie, people prefers mobile web to native apps.  When the difference is un-significant it is true, but unfortunately it is not always the case.  One big example: www.youtube.com on mobile doesn’t play all your videos.  The free app plays videos of the day but you can’t search that you want in the library.  The $2.99 native app let you play the videos of your choice.

-RIM is losing market share mainly in the US over Apple and Android.   

Outlook

Even with global market share shrinking slightly the stock is cheap, so the short term potential is good.  Will RIM be a major brand and mobile platform in 10 years? I’m not so sure in the US for the consumers sector but it will remain an important player in the business sector.  However, the company has competitive advantages in the emerging markets. It offers a good ratio quality/price for these customers.

With a P/E ratio of 11.1, the stock seems cheap. The global smartphone market is growing quickly.

Apple P/E ratio is 19.91, less if you consider the $51 billion in cash and has the momentum, but the question is can it maintain its higher valuation in the medium and long term?  I remember my economist teacher who said 14 years ago that in the tech sector, you can’t hold many tech stocks for the long term.  You have to trade more often.  2 stock crashs later he had a good point.

Apple's mobile ecosystems growth are remarkable (you can see the second graph), but the valuation of the firm is actually taken that into account. RIM valuation is not taking completely into account all of these growth factors.

Louis Rhéaume

Louis@infocomintelligence.com

Infocom Intelligence

What is hot in mobile games?

It appears that 61% of US smartphones users in October have used at least one mobile game.  Mergers and acquisitions in mobile games are hot.  In October, Ngmoco was sold to DeNA for $400M, providing a 1000% return for private shareholders.  On the other hand, Chillingo was acquired only for $20M by Electronic Arts.  Zynga an online game provider is now valued on the secondary market at $5.27 billion on SharesPost.  According to Levi Shapiro, Partner, TMT Strategic Advisors, these 10 mobile games companies are very interesting acquisitions targets.  It can be very useful to know why they are attractive for video game developers, such as those in the Montreal Video game cluster.


1-Rovio: The Finnish developer of “Angry Birds” is the No. 1 game in 70 countries with more than 30 million downloads, including 10 million paid downloads. Their strategy includes affordable pricing (99 cents) and ongoing engagement (free updates every 4 weeks). Using AdMob’s in-app advertising tools and their own house ads, Rovio is estimated to be earning $500,000 to $700,000 in monthly paid app and ad-supported revenue. Clearly, this is a company that could scale into a much larger player and has set the lofty goal of 100 million downloads, something only Tetris (Electronic Arts) has achieved. Potential buyers will need to bring scale and reach to migrate an iOS and Android success story into a “Transmedia Property.” Just as Disney bought iPhone game developer Tapulous earlier this year for a reported $50 million (including earn-out), studios like Sony, Paramount, 20th Century Fox and Warner Brothers could soon bring “Angry Birds” to a cinema, bookstore, console game or toothbrush near you. 

2-Unity 3D: 3D has moved beyond the cinema to the TV, laptop, handset and game console. For example, Nintendo announced its glasses-free, 3DS portable game player. Moreover, handset vendors are desperate to distinguish their wares and several original equipment manufacturers – including Sharp Corp., Motorola Inc., LG Electronics Co. Ltd. and Toshiba Corp. – are working on 3D handsets. What is missing is content – game developers don’t see a large audience ready to purchase 3D games. This year, global 3D TV sales are unlikely to surpass 5 million units. However, by 2015 that number should scale to between 50 million and 88 million new 3D TV’s. Unity 3D provides a platform for developers to quickly create and deploy 3D games for online, television, console and mobile. Unity has more than 200,000 registered developers worldwide, including Electronic Arts, Disney and Coca Cola. This could be an interesting strategic acquisition for a variety of players seeking competitive advantage in the 3D gaming sector. 

3-Greystripe: Want to start a “show me the money” discussion on Madison Avenue? Try raising the subject of mobile advertising. The entire sector is projected to reach less than $750 million this year (eMarketer), a pittance compared to the $70 billion on television advertising. However, a growing number of Q4 campaigns from retail, automotive and consumer packaged goods brands suggests rapid growth. This is what inspired Apple’s $250 million acquisition this year of Quattro Wireless and Google’s $750 million purchase of AdMob. Among the remaining independents, Greystripe is strong in the in-app advertising sector. Although games downloaded via app stores will contribute only 30% of U.K. mobile game revenues this year, the success of the Apple App Store has inspired new entrants to the app store fray, from Samsung Electronics Co. Ltd. to Amazon.com Inc. Look for Greystripe to get swallowed as the big guys prepare for war.

4-Gypsii: Think of Gypsii as a combination of Twitter and Foursquare for China. Micro-blogging (weibao) is a booming, although not yet profitable, sector in China. Local Twitter clone Sina Weibo claims to be the largest micro-blogging service in China, with more than 20 million registered users since launching in August 2009. Gypsii uses a hybrid subscription and ad revenue sharing model, including location-aware couponing, to incentivize its wireless carrier partners. In less than two years, Gypsii has deals with all three Chines carriers, nearly 3 million users and pre-load agreements with Nokia Corp., LG, Samsung, Lenovo and Huawei Technologies Ltd. Despite the slow 3G uptake in China, there are nearly 400 million active mobile Internet users in the Middle Kingdom. This includes the 50 million Chinese consumers earning $20,000 annually and spending at least $22 per month on mobile services. Web, mobile and e-commerce (still only $2.5 billion out of last year's $29 billion online eCommerce sector) companies seeking carrier relationships and a large base of consumers will be very interested in Gypsii.

5-Aurora Feint: While Apple may have its own social gaming network (GameCenter), third party social gaming networks like Ngmoco’s Plus+ and German business to business social gaming platform Scoreloop have built large user bases. Aurora Feint takes a multi-platform approach, with expertise in iOS (iPhone, iTouch, iPad) and Android and cloud-based game services like leaderboards, achievements and virtual currencies. Aurora Feint’s high traffic numbers in the United States – 3,400 games and over 45 million mobile gamers – make it the volume play in this sector and helped attract investment from major Chinese and Japanese gaming companies as well as Intel Capital. The company is poised to expand its user base with a deal announced last quarter with Verizon Wireless to curate and provide Android game recommendations. 

6-Vivox: Until the advent of video games, humans generally played games with other people. Vivox, and quite a few other players, recognized the importance of social interaction and created a platform for developers and social networks to integrate voice chat, video, instant messaging and presence within the visual experience. The advantage for Vivox is the installed base of 25 million users across 180 countries and 2 billion minutes of monthly voice chat. Even if voice is rapidly becoming a commodity, Vivox’s scale could compliment the expansion goals for large game publishers, virtual worlds or social networks.

7-Backflip Studios: Few studios consistently crank out hit games. Boulder, Colorado-based Backflip Studios has now had nearly 50 million downloads and a daily active user base of two million. In fact, its first four iPhone releases, including Paper Toss, Graffiti Ball, Strike Knight and NinJump, were all downloaded over four million times and ranked in the top five in Apple’s overall app store lists. Most importantly, Backflip is generating solid revenue through in-app advertising (iAd and AdMob) and cross promoting its paid games via its free games. Considering that research firm Flurry estimates the average revenue generated per online active daily user is $1.22, Backflip brings an interesting revenue base as well as its track record of making popular games. 

8-Free App A Day: Free App A Day is a website, app and community platform for the promotion of paid games on iPhone and Android that are free for a limited period. Apple’s App Store is now loaded with more than 240,000 apps, making discovery one of the biggest challenges facing publishers. The company has over a million active daily users and is now a King Maker for pushing games and apps into the top 10. Developers and publishers give away their apps for free for a limited time. Once these revert to paid status, the promotional effects from the daily push notifications offset the lost publisher revenue. Free App A Day then keeps a share of publisher paid app revenue for a fixed period.

9-Smule: No one is cranking out hit iPhone music applications like Smule. Having raised $13.5 million and achieved success with iPhone apps like “I am T-Pain,” “Ocarina,” “Glee Karaoke” and “Leaf Trombone,” the developers are now creating iPad versions. Given that 91% of iPad owners have downloaded an application and two thirds paid for these, it is no surprise that Smule already has its first iPad success story in “Magic Piano.” According to Smule, users played one of the songs, “Twinkle Twinkle Little Star,” more than 750,000 times. In fact, world-renowned pianist Lang Lang performed “Flight of the Bumblebee” on Magic Piano at the San Francisco Orchestra. This kind of engagement has many wondering if Smule will be the next Slide, which was acquired by Google in August for $182 million.

10-Flurry: Although virtual goods are the dominant form of monetization for online social games, until mobile application research firm Flurry released a report earlier this month, few knew that same trend has already come to mobile. Measuring its network of more than 50,000 developers across iPhone and Android, Flurry identified 80% of in-app revenue from micro-transactions, with the rest coming from ads. Despite a highly publicized spat with Steve Jobs earlier this year, as an analytics provider Flurry could be attractive to the likes of Nielsen, Comscore and NPD. Hedging its bets, Flurry has created its own set of tools for helping the developer community integrate virtual currency into their activities. 


Source: 
http://www.rcrwireless.com/article/20101110/OPINION/101109940

Louis Rhéaume
Infocom Intelligence
louis@infocomintelligence.com

Native applications versus mobile browsing popularity

Mobile customers will download around 25 billion mobile applications by 2015.   While apps are becoming popular, people often prefer the mobile Web.  In a Adobe's survey of mobile users, the company asked 1,200 U.S. consumers about their behavior with regards to the following categories: consumer products & shopping, financial services, media & entertainment, and travel.  Users prefered mobile Web experiences over apps in the products & shopping and media & entertainment categories. 66% said they prefer mobile Web to apps (34%) in these categories.  However, for social media, music, "self-contained" experiences like games and maps, consumers chose apps over the Web.

Native data applications, now account for 50% of all mobile data volume according to a new report from Finnish mobile analytics company Zokem. While the mobile Web browser was still the most popular smartphone "app," the use of native apps outside the browser is growing faster than mobile browsing itself.  A native app is an application available on a mobile platform such as Apple, RIM, android, etc.  The study analyzed over 10,000 smartphone users and 6.5 million smartphone application usage sessions in 16 countries during 2009 and 2010.  It appears that smartphone users with a data plan launch their mobile Web browser at least once a month and, on average, spend 300 minutes browsing the Web on their device, a figure which is comparable to mobile voice usage.

While the browser is still the most popular of all smartphone apps with 54% of data application time (time spent interacting with the app) and 50% of data volume, native applications (excluding the browser itself) now capture 46% of data application time and 50% of data volume.

The study also found that Facebook's native application is used by 12% of active smartphone users who engage with the app for 188 minutes, on average, per month. Twitter has a smaller monthly user base (only 4% of active smartphone users) but they average 311 minutes per month on the app.  Thus, we can affirm that users of Twitter use much more the mobile web.

A few years ago, smartphone Web browsing accounted for 70-80% of mobile Internet use, but now that number is largely shrinking in terms of relative use.  The trend towards increasing use of mobile apps over the Web browser is due to the fact that, in most cases, apps provide the best user experience.  For instance, a native YouTube app is faster than the use of mobile web browsing the web site of YouTube.  

With many platforms and operating systems available such as: Android, iPhone, Blackberry, Symbian, Palm's webOS, Windows Phone and Java for feature phones, developers will have to decide between "going native" or promote a mobile website instead.

Source: Readwriteweb.com

Louis Rhéaume

Infocom Intelligence

louis@infocomintelligence.com

BCE strategy revisited

The good strategic realisations

Bell Expressvu DTH service has been a great success for BCE.  It is a key element in the bundling of the « triple play » which is the combination of  voice, data and video through a sole provider (cable or telco).  The triple-play is becoming increasingly important:

« Coincident with the ability of the copper and coax networks to carry non-traditional services, customer needs are also evolving around three key services: voice (wireline and wireless), video and data. While some customers will prefer to select service providers on an individual basis based on a “best-of-breed” approach, many individuals have a clear preference for simplicity and low price. Perhaps ironically, the most important service is increasingly becoming the broadband connection. Operators with the ability to provide this triple-play offering (increasingly as part of a bundled offering) should have a decided advantage over those without. The benefits for the operator are:

(1) Enhanced revenue and cash flow generation per customer; and,

(2) Reduced customer churn and improved loyalty levels.

As a result, overall growth and visibility should improve. Those operators without the ability to offer a triple play, should consider partnerships and/or alliances (Talbot, RBC[1])».

The wireless division was the first in the industry to become free cash flow positive[2] around 2002. Another important strategic realisation was the building and development of Sympatico, the Internet arm of BCE.  The company was slow to enter the dial-up Internet provider access. Several little dial-up providers have flourished over the years, before Bell entered the market in November 1995.  However, during this period, Bell made a lot of money from the new dial-up services of the small providers.  Residential and business customers who used often the Internet needed a second telephone line, which increased the profits of Bell.  It is one of the main reasons why Bell and the majority of telcos, were late in the race for high-speed Internet over cable providers such as Videotron. It acquired TotalNet a growing Internet access provider, with its investment in Mpact Immedia (merged with BCE Emergis) in 1998.

Previous CEOs of BCE have started to reduce the overlapping in the activities between BCE and Bell Canada.  Jean Monty made some improvements in this area of cost-cutting and after, Michael Sabia reduced management staff between Bell Ontario and Bell Quebec. A clever strategic move during the reign of Monty has been the excellent timing for the spin-off to the BCE shareholders of the shares of the holding in Nortel.  The spin-off was done around the peak of Nortel in 2000 before it crashed by over 95%.  For Richard Talbot of RBC, it was a tough decision to do at this time but it was the right thing to do.  Among the others good realisations there are the investments in Bell Nexxia to compete the ex-Stentor member alliances, which help Bell to retain customers according to Talbot and the investments in Manitoba Telecom and Aliant (the consolidation of the Atlantic regional operators). 

The strategic errors

The wedding between the local services and the long-distance services appeared to be just an extension of the core activities of Bell.  Thus, a participation in Teleglobe with finally its acquisition in 2000, was not very surprising.  However, Teleglobe’s acquisition was the idea of Monty. Monty wanted to transform BCE from a Canadian telephony player into a global “Internet firm” through connectivity, commerce and content and by integrating information, communication and entertainment services.  With his background of investment banker, he maintained good relationships with this sector, in order to get advices for potential business target prospects.  Teleglobe was the nemesis of Jean Monty.  The acquisition turned in a disaster, Bell managers were « pitchfork » to Teleglobe, and tried some risky data projects which didn’t get tangible customers.  The Excel division was in a real mess and was divested at a fraction of its acquisition price paid by Sirois. BCE poured billions of dollars inside Teleglobe mainly for its data strategy, until it pulled the switch with Monty’s resignation. It appeared that the value of Excel divestment would even be higher than the value that BCE would get for its divestment of Teleglobe, to Cerberus Capital Partners in 2002.   A negative consequence of the problems of BCE with Teleglobe, have been the divesting of a very profitable cash flow generating subsidiary: the directory division Bell Actimedia (Yellow-Pages).

At its inception, Bell Canada International was the vehicle of BCE to export its specialised telecommunications know-how internationally, like in Saudi Arabia.  In the beginning of the 1990’s, there was an emerging globalisation movement where several players like the Baby Bells in the USA invest massively in privatisation bids in order to get international foothold, and diversifying the risk of intense competition in their local and long-distance domestic markets[3].   There was a investment frenzy similar to the recent bubble associated with the prospects of 3G cellular licenses internationally.  Over-bidding was often seen, since the firms who didn’t win a series of bid had strong pressures to finally win a bid.  According to Richard Talbot, BCI created a lot value, but the exit strategy of these international investments was poorly managed, and that value was never cristallized, unlike the spin-off of Nortel shares.  It hurted badly the reputation of BCE on financial markets since many lawsuits were launched in the closing and divesting of BCI.

The mixed successes

In order to better position itself in the content and distribution sector, Monty acquired the broadcaster CTV for $2.3 billions, ten days after the acquisition of Teleglobe in February 2000.  Another important investment, was made with Thomson in the Globe and Mail, which strengthened the new division Bell Globemedia.  Sympatico was also added but later separated from this division, raising the expectations over a sale of some of its assets.  Owning the content of the Globe and Mail permits for example for BCE to make special distribution agreements with its other subsidiaries such as Bell Mobility on its wireless devices.  However, critics argue that BCE could pay monthly subscription fees to access this content instead of owning theses highly paid assets.  These two major investments were made during the stock market bubble.

 

The repurchase of the 20% investment of SBC in BCE in 2002 appears like a failed attempt for synergies with the American operator, but the timing (sold during the correction phase of 2002) seems good since the stock of BCE is still facing turbulence and is expected to rebound moderately in the future, meaning that the repurchase could have been even more expensive. The cash infusion for BCE helps the firm to complete the repurchase of the public shares in BCE Mobile.  Bell ended its relationship with Lycos, which obtained mixed results. The company switched to select a new partner, the colossal Microsoft MSN.ca, for the development of a joint Canadian Internet portal in 2003[4].  

According to Richard Talbot of RBC, a questionable tendency at BCE have been deals where they have ceded major control of power, by giving put options to partners.  Thus, deals such as CGI where the power was heavily concentrated in the hands of the three founders while they possess few shares of the company is an example.  The put option of SBC in its 20% investment of BCE was very expensive to repurchase, and so was the investment in Bell West with Manitoba Telecom.

Important value creation and corrections

Two investments made over the reign of Jean Monty created a lot of value, but was also seriously affected by the crash of the dot.com bubble: CGI and BCE Emergis.  However, CGI was first the idea of Louis Tanguay the CEO of Bell Canada, who got a call from Serge Godin of CGI[5].  The 26% participation of BCE in CGI for $18.4 million in 1995 would become a very profitable investment since CGI revenues were only $100 million  (revenues will be around CAN$4 billion in 2005). Bell Sygma was merged after with CGI and the participation increased to 44% (under press at March 2004, the participation is now 29.5% due to the shares issuance of the acquisitions), with the goal that customers need more integrated package of computing and telecommunications solutions.

BCE decided to not use its option to become the majority shareholders and buy more shares of CGI.  The company brought around $200 millions directly in contracts to BCE[6].  A strategic option could be similar to the former relationship with Teleglobe: BCE could sell its position in the long term while maintaining a « preferred supplier » relationship with CGI for its telecommunications needs.  The synergies between computing and telecommunications services didn’t appear much attractive for BCE: Sabia later sold BCE’s investment in CGI.

BCE invested $100 millions to acquire Mpact Immedia in two rounds of financing, and merged its activities with Bell Emergis[7].  The combined company had revenues of $75 millions in 1998 and $316 million in 2003 ($346 millions in 2002).  CGI has now a market capitalisation of $3.1 billion and BCE Emergis $593 millions, at March 27, 2004.  However, these investments have consumed a lot of management time at BCE recently.

Sabia divested Emergis and Monty later became involved on the board of directors.

The reactions over BCE convergence strategy

The financial market was first receptive with the diversification moves of Jean Monty, which goes in line with some academic research[8]. However, the perception of the stock market and the business press changed dramatically with news such as the big write-offs of AOL Time Warner and Vivendi Universal.  The Canadian press was quick to critic the convergence acquisitions of Monty for the reason behind the turbulence of the stock.  Monty mentioned himself, that he had mainly a problem of credibility with his decisions to buy and further invest massively in Teleglobe, which pushed him to resign.  The convergence strategy of combining several forms of information inside an information sector such as content and highways appears recently promising for a company such as Quebecor.  Innovation capacities, cross-selling and cross-promotion takes some time to implement and project such as Star Académie seems to demonstrate that convergence at this scale can create value.  According to Kona Shio, financial analyst, the business community didn’t not let Monty the time to execute properly his strategy (he himself mentioned the need to wait for two years), they wanted results in the short term, while the economic context was tough.    For Dr. Yvan Allaire, Emeritus professor of strategic management at University of Quebec at Montreal :

« la démission de Jean Monty, prouve que la stratégie de convergence doit encore composer avec des difficultés d'exécution redoutables.  Au début d’une période de turbulence [comme le décloisonnement des services financiers] , il est presque impossible de prévoir comment les comportements des acheteurs seront modifiés par le nouveau contexte et quelle sera la demande véritable pour les nouveaux services et, en fait, quels services parmi toute une gamme de possibilités recevront la faveur des acheteurs. À ce jour, la convergence dans le secteur des médias/télécommunications/ câblodiffuseur/Internet demeure un pari voulant que les bénéfices d'une offre intégrée auront une valeur économique réelle pour les acheteurs/consommateurs. Certains dirigeants souffrent de presbytie en ce que l'impact des changements en cours leur semble plus immédiat, plus rapproché qu'il ne l'est en réalité. Ces nouveaux marchés, conséquences des nouvelles technologies, que ces dirigeants voient si distinctement, seront bien réels mais un jour plus lointain. Ainsi, la convergence, il n'y a pas de doute, produira éventuellement de nouvelles combinaisons de services et produits; l'enjeu pour les entreprises est d'apprécier selon quel horizon temporel cela se produira. D'autre part, les bénéfices de la convergence seront réalisés en longue durée; or, les marchés boursiers, pourtant si enthousiastes à une époque récente, s'impatientent et perdent rapidement confiance dans cette stratégie. La suite est prévisible. Il est tellement facile après coup d'être sage et omniscient. Ces hommes d'action ont voulu transformer leur entreprise afin de saisir de nouvelles opportunités de marché. C'est un paradoxe de la vie des organisations que les fautes d'omission sont rarement punies alors que les fautes de commission reçoivent de dures sanctions. »

One error of the convergence vision could have been to focus too much on acquisitions to put in place the convergence in the info-communications sector.  BCE could have tried more alliances and partnerships at lower costs than acquisitions, while leveraging and not stretching too far the centre of gravity of its core competencies.  The international activities of BCE have been a disaster since BCI is liquidated all its assets and Teleglobe felt in bankruptcy.  However, a promising development of the convergence strategy could be the triple play, the ability of BCE to offer 3 or 4 types of services to its existing customers, while reducing its churn.  That opportunity could create a lot of value for its shareholders.  Sabia even discarded the over-used term “convergence” from his communications with financial analysts. 

At June 1998, the international activities of BCE: Nortel, Bell Canada International and Teleglobe consisted of half of its market value.  In 2004, Nortel was no more related to BCE, BCI is divesting all its assets (some with profits) and Teleglobe assets were sold at a small fraction of its purchase after falling in bankruptcy.

Under Michael Sabia, BCE has retired from some activities and started new products linked to the Internet[i].  The company faces some challenges particularly in its business division while the residential performs well.  BCE later announced an aggressive decision to use around 90% of its traffic with VoIP, up to 2006.  The aim was to save in the operating costs and to offer new high value services.  Furthermore, the Internet platform would be dereglemented which would let more flexibility in the strategy of BCE.  The company intend to build a quick lead in order not be bypassed by competitor such as Primus or Vonage Phone in the retail, or Allstream in the business sector. 

According to Sabia : « BCE is living in a time where innovation, simplicity and speed are now very critical… we are dealing with an identity crisis, the market doesn’t understand us anymore. Who are we? In the past the company focused too much on technology and products and not enough on customers… Changing the culture of a company takes many years, but I am not a patient man.[ii] »

New trends

Still, today under CEO George Cope,  the shares of BCE remains a solid “market performance” investment with the recurrent cash flow from operations of Bell Canada particularly, and the fact that the dividend yield is among the highest of the Toronto Stock Exchange. However, BCE rely heavily on the project fibre-to-the-home (FTTH) in Québec City, and Bell’s Fibe TV service for interesting growth in revenues and profits in the future.  The stock has increased in the last year mainly due to the rise of its dividend, and cost savings, which is not a long term sustainable value creation avenue. Last month BCE just bought again CTV, after it was divested by Sabia. BCE is paying $1.3 billion plus debt, for full control of the company. BCE currently owns 15 per cent equity in CTV.  It is the first move of BCE toward convergence since the departure of Jean Monty.       

Louis Rhéaume

Infocom Intelligence

Louis@infocomintelligence.com

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[1] RBC report, Richard Talbot, January 27, 2004, «  Canadian Telecom Services, Battle For The Broadband Home ».

[2] Cash flow of the firm less capital expenditures, which are very high for the upgrade of wireless networks.

[3] ANNE D. SMITH, Anne and CARL ZEITHAML, « The Intervening Hand Contemporary International Expansion Processes of the Regional Bell Operating Companies », JOURNAL OF MANAGEMENT INQUIRY, Vol. 8 No. 1, March 1999, pp. 34-64

   

[4] Fortin, Karine , Le Devoir June 17, 2003, « Bell et Microsoft créeront un portail Internet conjoint »

[5] Jannard, Maurice, « Bell Canada investit 18,4 millions dans CGI », La Presse, October 27, 1995

[6] Bérard, Diane, «La partie d'échecs de Sabia »,  Commerce, Vol: 104 No: 4, April 2003, p. 46

[7] Jannard, Maurice, « Bell Canada fait l'acquisition de MPACT Immedia », La Presse, June 5, 1998, p. c4; Paquin, Guy, «BCE assoit son contrôle d'Emergis... à prix d'aubaine », Les Affaires, January 30, 1999, p. 58

[8] Rhéaume, Louis, 2000, « Value creation in evolving information industries : the effect of US mergers ». M.Sc thesis, Concordia University.   The author reports that contrary to most of the research analyzing the overall industries, bidders of mergers inside the information industries (composed of three sectors : content, appliances and highways) obtained positive returns in the short term.  Thus, the market response appeared favorable to those mergers, few days around the announcement, whether it is a highly related or a highly unrelated mergers (on average), but still inside the information industries : communications, publishing, electronics, computing and entertainment.

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[i] Canadian Press, « Michael Sabia n'est pas inquiet, les revenus et les profits de BCE sont en baisse »,  Le Devoir, February 5, 2004

[ii] Vailles, Francis, « Bell prend le virage de la téléphonie Internet Le bénéfice augmentera de moins de 10% », La Presse, December 18, 2003; Bérard, Diane, « La partie d'échecs de Sabia », Commerce, no. Vol: 104 No: 4, April 2003, p. 46

Does Research in Motion (RIM) is still a contender in wireless?

It appears that RIM web usage is growing, which is not the case of Apple's iPhone OS web usage. In fact, Blackberry users have doubled their Web presence over the course of the past year.

The data is from Statcounter:

Although the chart clearly shows Android's rise in terms of Web usage, it surprisingly shows Blackberry's increased market share, too.

It appears that RIM should not be discarded as as serious contender in the corporate and consumer sector. However, increased Web usage only shows that RIM users are doing more mobile Web surfing, not necessarily that the platform as a whole is making a comeback, but the new Blackberry OS (version 6), available now on the Blackberry Torch, offers a much-improved Web browser based on the open-source WebKit technology, the same technology that's used on the iPhone and on Android. Thus, we can expect more Blackberry devices in the future, and Blackberry users' Web usage will certainly grow even more.

For developers targeting Blackberry users with mobile websites or services as opposed to native applications, this increase in browsing are good news. But if you're looking to get the most return on investment for your native applications, you still need to look at the raw numbers of native application users on the top mobile platforms.  Android has the biggest momentum and most attractive ROI per app. 

Louis Rhéaume

Infocom Intelligence

louis@infocomintelligence.com

10 great Android applications

Here are 10 great Android applications:

Android is the mobile platform of Google. It reached its 100,000-app milestone last week. It is about two-thirds less than the number available in Apple's App Store, but Androis ecosystem is the fastest growing mobile OS. More than 200,000 Android phones are activated daily. iPhone activates more than 275,000 per day. 


1-Intuit.  I worked for Intuit in 2000, in order to test a real time portfolio management stock market software.  It never came in the market.  But Intuit is still a real incumbent in finance software.  Intuit acquired Mint, which allows users to manage each aspect of their finances from their smartphone, is a big part of that strategy. Mint users can download their bank, credit card and other account information at Mint.com (the site uses bank-level encryption), the app displays expenses in categories like restaurants, groceries, and health and fitness. You can also set spending goals and receive notifications if you're over-budget for the month. The only functions missing on the app are the ability to display data in pie charts and custom graphs and suggestions about how to save your money, which are all offered on Mint's website. 


2-Amazon Kindle Reader 
It is the Android version of Amazon's Kindle Reader is the best thing to happen to Android users who often find themselves alone with just their phone. While the quality of an Android Kindle reading experience depends on the size of one's screen and one's ability to find a shaded area -- it's too hard to make out the words in bright sunlight -- reading one of the 725,000 books on Android is not much different from reading on the Kindle itself. Users can bookmark, add notes and highlight passages and look words up via Dictionary.com.  The app also allows books bought on Amazon to be shared between phone and Kindle at no extra cost.


3-Yelp
Yelp integrates mapping technology that directs users to locations as they walk -- in a pop-up, interactive Google map. The Monacle feature allows lost users to see a red dot on their screen as they hold their phone up on the street, helping guide them to the exact location of where they want to go. One problem: while users can draft restaurant/shop reviews from within the app, they can only publish the write-ups by going to Yelp's website.


4-Slacker Radio 
Pandora is a leader, but Slacker Radio offers a greater number of songs and playlists searched and compiled by genre artists. The resulting playlists seems to be a little more relevant to our tastes than what we heard via Pandora. Despite the annoying audio ads that come with the free version of the app, the Slacker experience -- especially the paid versions, which are either $4 a month or $47.88 a year - exemplifies what we've come to expect from Internet radio: the ability to customize our own "radio station," more allowance of song skips and the option to cache our stations, so we're able to listen to songs even when in an area without wireless accessibility.


5- Bump
Bump's technology, available for iPhone and Android users, allows folks to exchange contacts, pictures and calendar events between two phones by tapping them together. Users can also connect on Facebook, Twitter and LinkedIn using the app.  Additionally, Bump, downloaded so far by more than 10 million users, can be used for mobile payments, enabling PayPal app users to transfer money by bumping phones.


6-Advanced Task Killer
Owners of Androids like the Droid X and the HTC Incredible might not realize that Android apps often run in the background, draining the battery and slowing down functionality. Advanced Task Killer shuts down these programs (with a user's permission, via a checklist like the one above), but keeps the essential services running to free up memory.


7-Astrid
Astrid provides users with a customized to-do list. Users start by adding simple tasks - a wake-up alarm or "buy milk," for example - then follow up with tags that help with prioritization. Astrid tracks the time spent on a task; we like the encouraging, youthful language that pops up with the reminders, like: "You said you would do it: Edit Android App Story."  It also syncs with Google Tasks.


8-Barcode Scanner 
It is targeted toward avid comparison shoppers, Barcode Scanner lets Android users scan a product's barcode with the camera phone; the app then pulls up prices, reviews and shipping labels associated with the item. Users can discover if a book found at a Barnes & Noble store is cheaper online or at a competitor's store or website. The applications, powered by Google, can also scan QR codes - those big, square-shaped barcodes often placed on companies' websites that contain URLs, addresses and contact information.


9-Dial Zero
Dial Zero provides a directory of toll-free customer service numbers for over 600 companies, allowing users to bypass the automated recordings to more quickly reach a person.


10-Seesmic 
Seesmic allows users to manage Facebook and multiple Twitter accounts and updates in one easy-to-use interface. Founded by French blog guru Loic Le Meur, this social media-managing space is crowded with similar apps, but Seesmic seems to work a little more seamlessly and also lets users record and upload videos to YouTube, share photos on yFrog or TwitPic and shorten URLs.

Louis Rhéaume
Infocom intelligence
louis@infocomintelligence.com