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2 nd

edition

The
f
Shi t
The Evolving Market, Players and
Business Models in a 2.0 World

Allison Cerra & Christina James


The Web has transformed our daily lives. While the
Internet of the 1990s was largely characterized by one-
way, text-laden information, the Web of today offers a
dynamic, interactive, multimedia experience unique to
each user. The impact on underlying networks is equally
seismic, as operators struggle to address a seemingly
insatiable broadband appetite on the part of end users.

Developers find themselves in an equally daunting


conundrum as many struggle to generate profit in a
fragmented world of devices, operating systems and
networks. Indeed, the very innovation of the Web is
threatened by the increasing cost of capital facing
network providers and a lack of profitable business
models confronting developers.

As the Web has transformed the way we interact


and communicate, so too must business models be
transformed to address these new opportunities. The
estimated $100 billion market opportunity that results
when service providers offer a growing web developer
community access to powerful network-based
capabilities fuels future innovation and creates a new
ecosystem of fruitful interdependencies. End users
benefit from a better experience, developers benefit
from a richer set of capabilities, and service providers
benefit from monetizing these currently guarded
capabilities. In the end, the impacts to larger social
concerns, including those in education, government
and healthcare, stand to redefine the landscape for
Web 2.0 citizens in a global economy.

www.theshiftonline.com
2 nd
edition

The
f
Shi t
The Evolving Market, Players and
Business Models in a 2.0 World

Allison Cerra & Christina James


Second Edition, January 2011

Alcatel, Lucent, Alcatel-Lucent and the Alcatel-Lucent logo are trademarks of Alcatel-Lucent. All other
trademarks are the property of their respective owners. The information presented is subject to change
without notice. Alcatel-Lucent assumes no responsibility for inaccuracies contained herein.
Copyright © 2011 Alcatel-Lucent. All rights reserved.
Table of contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Prologue The End of the World Wide Web As We Know It . . . . . . . . . . . . 13

Part 1: The Generational Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Chapter 1 Baby Boomers: The Eternally Young . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Chapter 2 Generation X: America’s Middle Children . . . . . . . . . . . . . . . . . . . . . 41

Chapter 3 Millennials: The Digital Natives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Part 2: The 2.0 Ecosystem Stakeholders . . . . . . . . . . . . . . . . . . . . . . 63

Chapter 4 The Developer Market: 14 Million Creative Minds and Counting . . 65

Chapter 5 Through the Looking Glass of the Commercial Developer . . . . . . 77

Chapter 6 Through the Looking Glass of the Enterprise IT Developer . . . . . 95

Chapter 7 Advertising: The Eyes Have it . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Part 3: The Consumer 2.0 Influence . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Chapter 8 Video: The Next Unstable Business Model . . . . . . . . . . . . . . . . . . . . 131

Chapter 9 Social Networking: Monetizing Billions of Conversations . . . . . . . 151

Chapter 10 Gaming: Not a Spectator Sport . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

Part 4: The Enterprise 2.0 Imperative . . . . . . . . . . . . . . . . . . . . . . . . 183

Chapter 11 Small Business: The American Dream . . . . . . . . . . . . . . . . . . . . . . . 185

Chapter 12 Healthcare: High Stakes, Higher Rewards . . . . . . . . . . . . . . . . . . . 197

Chapter 13 Government: Protector, Employer, and Servant . . . . . . . . . . . . . . . 211

Chapter 14 Education: The Global Achievement Race . . . . . . . . . . . . . . . . . . 223

Chapter 15 IT in the Large Enterprise: In Search of Relevance . . . . . . . . . . . 237

Part 5: The 2.0 CASE FOR LATIN AMERICA . . . . . . . . . . . . . . . . . . . . . . . 247

Chapter 16 Brazil and Mexico: A Tale Of Two Countries . . . . . . . . . . . . . . . . . 249

Chapter 17 Small Business: Latin America’s Growth Engine . . . . . . . . . . . . . 263

Chapter 18 Developers: Brazil’s Emerging Market . . . . . . . . . . . . . . . . . . . . . . 275

EPILOGUE The Evolved Value Chain In A 2.0 World . . . . . . . . . . . . . . . . . . . . 285

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
the shift

forEword

foreword | 5
the shift

6 | foreword
the shift

> The internet has brought us to a remarkable point


in history. Many factors have converged to make the present a very disruptive
time, rich with innovation and cultural change: Moore’s Law, nearly ubiquitous
broadband, cloud computing, and social read/write technology across the
consumer and enterprise Internet.

Employees are Tweeting their bosses, people are legally listening to any music
they like (without paying for it), the newspaper may stop printing soon and
many intelligent people are unafraid that that will lead to a new “Dark Age.” We
flip and scroll through iPads that look like they are from The Jetsons cartoons—
and those futuristic tablets were the fastest product in history to hit $1 billion in
sales. It’s an incredible time.

And yet the pipes are “dumb.”

The pipes through which all this Internet and telephony data flows are dumb. To
a greater or lesser degree, they just shoot all the data through, undifferentiated
by content type or source. There is a political perspective that says this is how it
ought to be: network neutrality legislation might make the pipes stay dumb. But
let’s consider another side of the story.

foreword | 7
the shift

What if telecommunications service providers instrumented their data flow?


What if they measured, monitored, analyzed, and made data about the data
available for outside software developers to build services around? Not to peek
into the darkened bedrooms of movie thieves and miscreants, squandering
bandwidth and intellectual property, but to build value-added services that
everyone gains from—on top of an intelligent network.

That’s what this book is about. It’s about the unique types of data that network
providers can offer a larger ecosystem over which developers can build software
and services. What kind of data can network providers offer a developer
community? This is key. The network knows the presence, availability, location,
and profile of a software user at the end of the pipe, on a laptop, or on a phone.
Maybe hospitals want to know where in the facility a doctor is located and what
their professional profile is. (“Which cardio specialist is closest to the fourth
floor right now?”) That’s something a network could expose to a developer, who
could build an interface to serve up that data in a way the software user at the end
can make use of. In the parlance of the milieu, the network provider could offer
an Application Programming Interface (API) that can be used by third-party
developers to create integrations, interfaces, and mashups.

The network also knows what’s going on with its own quality of service and it
has diagnostic data. It has security and billing capabilities. Those are things that a
smart network could offer developers as a service. The research you’ll find in this
book is evidence that there is developer demand for exactly that.

Large quantities of meaningful data are available in real time from the network
provider. That means there are opportunities for innovation—limited only by
processing capacity, policy, and the imagination of a wide-open world of software
developers. What does that mean? It means new apps, new user experiences,
better performance, more engagement, and new types of software we didn’t even
know we wanted yet.

Cerra and James spend most of this book discussing the cultural changes that various
groups of people in society (Baby Boomers, Millennials, advertisers, enterprise IT
developers, and education and healthcare workers) are undergoing, based on market

8 | foreword
the shift

research and contemporary anthropology. They discuss the needs these groups have
that could be filled by network provider APIs. The different groups have different
desires and aims, but a smart pipe has something to offer them all.

Multiple markets are willing and able to pay for these kinds of features, according
to the many studies, both original and compiled, that you’ll find in these pages.

That’s key. Consumers and developers want and will pay for the kinds of features
that can be built on top of presence and availability data, for security and
diagnostics. What does that money then help pay for? More pipes!

Everyone wants more and faster bandwidth and consumers would like to get it for
less money than they pay today. How on earth will providers build out additional
capacity, while lowering the cost of basic service? Cerra and James argue that the
types of features that could be upsold to developers and consumers could be the
source of revenue that pays for the much-needed build-out of more network capacity.

There’s a lot to be enthusiastic about, but there are warnings here too. The
authors are not in the “privacy is dead” camp, for example. In fact they make
some bold statements about the primacy of user control over their own data.
Value adds built on top of user activity and profile data have to be opt-in, they
argue. The authors offer an unusually sophisticated and multi-generational
analysis of peoples’ changing requirements for privacy with regard to their
personal information.

Cerra and James have written here an informative articulation, not just of
the consumer privacy landscape, but of many places where technology and
contemporary culture intersect.

This, serving the opportunities termed “application enablement” in this book, is


what network provider (and now book publisher!) Alcatel-Lucent intends to do
a lot more of in the future.

This is a book that many people will find informative, however, whether they are
a candidate for Alcatel-Lucent’s services or not. That’s the best kind of marketing

foreword | 9
the shift

there is, companies that make a substantial contribution to conversations of


general interest. Their brand rides alongside all the general interest, as readers
pass the company’s contribution around to a larger number of people. That
larger group includes a smaller percentage but a larger total number of sales
prospects. And we all win. That’s the marketing model that’s emblematic of the
new Internet that this book is talking about making all the more sophisticated
through application enablement.

Alcatel-Lucent recently acquired the API database, monitoring service, and


news blog—ProgrammableWeb.com, which you’ll see references to later in the
book. It’s a great place to learn about these APIs that will be mashed up with the
kind of data provided by intelligent networks ascribing to the strategy described
in this book.

The potential here is so rich that I hope people new to the world of APIs are
properly excited about it. It’s one of those things that you might have to see to
believe. Thus the importance of ProgrammableWeb, as it’s the place to go to see
a lot of these recombinations of real-time flows of data and functionality from
multiple sources put into new contexts and given new interfaces, analyzed to
tease out new hidden patterns and opportunities.

How will the computing clouds around us know where we are? How will they
know what we want to see? How will security be managed and diagnostics
run? Intelligent networks could provide exactly that kind of information to the
developers of the augmentation applications.

So that’s a picture of the upsides of this kind of application enablement on the


part of network providers, and it’s a picture that’s very well told in the following
pages. But what about the dumb pipes?

Some people say they like their pipes dumb. Proponents of network neutrality
legislation may disagree with the premise that network traffic ought to be
instrumented, analyzed, and handled differently. Cerra and James make mention
of this for sure, but argue that we’ll have to wait and see what kind of legislation
comes into play. Some will, probably.

10 | foreword
the shift

Meanwhile, the Internet waits for no one. There is incredible potential for
the development of mutually beneficial technology based on what’s called
application enablement in this book. Give it a read and imagine the possibilities.

Marshall Kirkpatrick
Co-Editor, ReadWriteWeb
Marshall@MarshallK.com

August 2010

foreword | 11
the shift

12 | foreword
the shift

prologue

The End
of the World
Wide Web as We
Know It

prologue | 13
the shift

14 | prologue
the shift

> IN 1999 I (ALLISON) WAS EMPLOYED BY ONE OF THE LARGEST


service providers in the United States, marketing a service that was in its infancy
at the time: Digital Subscriber Line. I recall sitting in several meetings where
we held vigorous debates over how to best market this new flavor of telecom
alphabet soup—DSL—to the masses. We were eager, yet cautious, about its
potential. If successful, this service could give us a new revenue stream not seen
since the days of dial-up. At the same time, many couldn’t help but wonder if it
would ever really take off. After all, we lived in a world where email remained
the proverbial “killer app” of the Internet. Why would anyone need, yet alone
pay for, faster Internet speeds when the 56K modem was perfectly adept at
navigating a virtual world largely defined by text?

Ten years later I found myself at a different, and much smaller, regional service
provider. And again I sat in a healthy debate about the company’s broadband
service. Only this time we weren’t contemplating if anyone would actually pay
for faster Internet speeds; instead we were asking ourselves how we could afford
to continue with the flat-rate broadband retail pricing popularized in the 1990s.
Our issue was no longer in attracting new customers to the network. We found
ourselves in a much more difficult position: How could we keep pace with
our customers’ usage when the traffic consumed on the network was growing

prologue | 15
the shift

at a rate faster than anyone could have anticipated? The debate around the
table—and the landscape around us—had changed radically in the past decade.
What happened? How did we get here? Just a couple of landmark moments in
broadband history show us a hint of the answer:

In February 2005, three unknown former PayPal employees took a quantum leap
forward in revolutionizing the Web as users knew it. What started as an obscure
video-sharing site marked the shift toward a Brave New Web World. A scant 21
months later, the phenomenon now ubiquitously known as YouTube would sell
to powerhouse Google for an astounding $1.65 billion. Less than 2 years later,
the site added one more coup to its meteoric ascent as a Web 2.0 heavyweight,
displacing Yahoo! as the second most popular search engine worldwide.

This certainly wasn’t the first time in history an unknown web fledgling
would command a premium on the market. The “superhighway” was littered
with investments in start-ups. But this was different. YouTube wasn’t just any
web start-up. It sat at the crossroads of two game-changing web trends: the
proliferation of user-generated content married with bandwidth-hungry video
distribution. The result was a seismic shift that rippled far beyond user behavior
to impact the underlying broadband networks strangled beneath the weight of
exponential data usage almost overnight.

Fast-forward to another historic date in broadband history: June 29, 2007.


On this date, hundreds of curious consumers lined up at retail stores across the
United States to get a glimpse of the newest device to hit the mobile scene: the
Apple iPhone. Mobile phones come and go. But there was something special
and much anticipated about the iPhone’s debut. A phone with no keyboard,
no complicated owner’s manual, and no obtrusive user interface had been the
product of pipe dreams. If any company could deliver on these wildly ambitious
promises, it was Apple. And those eager consumers who waited patiently in long
lines for the next wireless “it” device would not be disappointed. Within a few
months of launch, the iPhone was home to thousands of third-party applications
that produced a ten-fold increase in traffic consumed by users. If YouTube
had revolutionized the Web from a one-way, text-laden experience to a fully
immersive multimedia playground, the iPhone had upped the ante and rocked

16 | prologue
the shift

the wireless world with new business models directed at a burgeoning developer
community. The 2.0 shift had moved from wireline to wireless networks,
indelibly changing the broadband landscape once again.

Quite simply and subtly, the consumer had become the producer. Few could have
anticipated such a radical shift back in the 1990s when broadband first reached
critical mass. In a Web 1.0 world, the consumer is just that—the beneficiary of
content provided by others. A Web 1.0 world is characterized by professional
content providers creating a one-way communication path to consumers.
Download speed reigns supreme. Text-rich environments are the norm. And
consumers are happy simply to digest media and content made available to them
by others.

Web 2.0 changed everything. With greater ease, more attractive pricing, and
higher quality than ever, consumers became equipped to produce their own
content. The digitization of everything from cameras to cost-effective storage
made every user a potential cinematographer, paparazzo, or artist. Further,
always-on broadband networks delivering speeds once reserved for the
enterprise power user and available at mass-market pricing fanned the flames
of growth. For the first time, consumers were given a voice. And that voice
would be heard. Without making professionally generated media extinct, user-
generated content created a new forum of expression. Blogging, podcasting,
social networking, texting, and crowdcasting all changed the landscape from
a one-way communication aimed at the masses to a two-way conversation of
millions. The proliferation of content produced and consumed would spawn a
new generation of bandwidth-insatiable “Millennials,” who would literally grow
up in this online, immersive world.

THE EXAFLOOD COMETH?


The traffic explosion born on the wireline network, and quickly replicated on the
wireless front, had prognosticators spinning. Soon there was talk of a new wave
in the broadband industry, coined the “exaflood” phenomenon. The question
was simple: How much exponential traffic could the network sustain given
incremental increases in bandwidth over such a short time frame? The question

prologue | 17
the shift

was not grounded in profitability as an end pursuit; rather, it contemplated the


physical capacity constraints of underlying broadband networks.

While capacity planning is certainly important, a more fundamental question was


on the table: Who would continue to invest in networks crippled by a seemingly
insatiable broadband appetite? Look to history for the obvious answer. Broadband
networks are the product of billions of dollars invested by service providers. For
years, AT&T, Verizon, Comcast, Time Warner, Sprint, and their communications
ilk poured money into fatter and faster pipes for end users. We witnessed broadband
speeds accelerate from a paltry 768 kilobits per second (still over twelve times faster
than the fastest dial-up service) to well over 10 megabits per second. Simultaneously,
wireless morphed from a voice-driven luxury reserved for the enterprise employee
or safety-conscious consumer to an entertainment and communications necessity
for the masses. And, at the time of this writing, a new FCC administration under
Chairman Julius Genachowski has issued an industry call-to-arms to equip 100
million US households with 100 megabits per second over the next 10 years.

Where do we go from here? Some would argue that the service providers that have
invested in these networks simply must continue to do so. After all, they benefit
from subscription-based revenues paid directly by end users for the privilege
of access. But, if these service providers must continue to make investments in
networks in the face of escalating broadband traffic and do so with flat, if not
declining, retail pricing plans, how can they generate an attractive Return on
Investment (ROI) to shareholders? Some point to greater efficiencies in networks
themselves, akin to Moore’s Law, a trend coined by Intel co-founder Gordon E.
Moore all the way back in 1965, which finds computing power doubling roughly
every 2 years. Though Moore’s Law certainly plays a part in allowing the service
providers the benefit of more attractive costs per transported bit, not even it
can offset the incremental expense born of an insatiable broadband appetite
on the part of end users. And, if there is no compelling reason for these service
providers to continue investing, how does the next Facebook or YouTube reach
an audience over a network capable of delivering its value?

Some are turning to the broadband cap as one potential answer. Rather than
offer end users a flat-rate, all-you-can-eat, monthly broadband price, cap their

18 | prologue
the shift

usage at a specific allotment per month, after which point the user pays per byte
downloaded. The cap places the tax of the network largely on the backs of those
consuming it the most. The challenge remaining, however, is two-fold:

1 How does a service provider begin re-educating a consumer base on how


usage will be billed under this new model? The industry spent the better
part of 10 years explaining to the public what download and upload
speeds are and why they are important. Even today, with broadband levels
reaching saturation, few consumers could intelligently answer what a
megabit-per-second rate really provides, though they have been educated
that faster is better. Imagine the complexity associated with educating these
consumers on what a gigabyte is or how many gigabytes their household
consumes in a day, week, or month. Further, how do you empower the
consumer—particularly parents—to monitor their household traffic
and impose limits on children who could easily digest the monthly cap
allotment all on their own? You get the picture. Marketing bits and bytes is
complicated. Bandwidth caps add to the complexity.

2 Caps are interesting, but temporal. Today’s broadband hog is tomorrow’s


casual user. How does a service provider retain flexibility in adjusting
broadband caps dynamically as usage continues to escalate? Yet again, we
have added complexity to the system.

Many would argue with us on these points and refer to several successful examples
of broadband caps being imposed elsewhere around the world as proof points in
their corner. While we certainly agree that other service providers worldwide have
successfully transitioned from a flat-rate to usage-based broadband pricing model,
we submit that there are other, perhaps better, ways to monetize the incremental
traffic load on networks rather than through a purely transactional model between
end user and service provider. This shift simply commoditizes gigabytes on the
provider network as opposed to megabits per second. Network providers remain a
utility through which others provide services and applications with perceived value
to the user, and they still fail to establish a richer relationship with consumers and
developers that creates enough revenue to cost-justify continued network investment.

prologue | 19
the shift

If we begin to look at the broadband network and ecosystem fundamentally


differently and more broadly, we can discover new business models that go far
beyond subscription-based billing between service providers and end users.

THE SHIFT: 1.0 TO 2.0 DIFFERENCES

1.0 2.0
One-way communication Two-way experiences

Text-laden web environment Video-rich web environment

Broadband for fixed networks Broadband across any network

Flat-rate broadband pricing Metered broadband pricing

Providers aspire to develop the Ecosystem of developers leveraged


next “killer app” to create apps

THE NEED FOR A NEW MODEL


If there is one lesson the iPhone has taught us, it’s the value in exposing
intelligence—in this case, through a device—to a broad developer community.
iPhone users have much more than just a phone. They are armed with well
over 300,000 applications in their arsenal, from the most inane and obscure to
the most practical and popular. Consider the power of 300,000+ applications
limited to one device that has only reached critical mass in the past 2 years. If one
device can create this frenzy, imagine for a moment if intelligence in networks
could be exposed in the same way.

Another lesson from the iPhone is the hunger consumers have for being able to
do everything they need to do and access all the data, video, communications,
social media, and any other imaginable content in a seamless way with a simple
interface. Consumers want the content they want, when they want it, and how
they want it. With demands like that, even a device like the iPhone fails to
deliver completely.

20 | prologue
the shift

To fill this need, over-the-top competitors take advantage of service gaps between
providers, offering point solutions that tie together traditional communications
services, video, and social media. Right now, consumers are forced to use these
makeshift point solutions to achieve their goal of anytime, anywhere access.

For example, if consumers want to watch video they’ve purchased on different


devices, even with all the options available to them, they must be their own
systems integrators. They can load video onto a mobile video device—an iPod
or other portable player. They can hook up their PC to their television. They can
also watch video from on-demand services, like those from Amazon or Netflix,
on the PC or on TV if they have a set-top box or special Internet-equipped
DVD player. They can buy Sling hardware or software to watch their TV service
while away from home. But not all of the services users have paid for are available
across all of the available platforms. A consumer runs into the constraints of the
walled gardens offered by their iTunes, Amazon, Netflix, or TV services, and
these limits occur even after significant investment in subscription fees, digital
content rights for different platforms, and the cost of devices such as portable
digital video devices, specialized set-top boxes, PCs, HDTVs, and more.

What’s phenomenal is that despite the complexity of stringing together these


different services and devices, many consumers are doing it. They are doing it for
video, for communications, and for their social media profiles. They have already
decided it is worth their time and their money.

While they may be loyal to a particular device, such as their iPhone or


BlackBerry® smartphone or their HDTV, providers who can offer the most
seamless experience across platforms and integrate with new media will hold
a strong lure with consumers. In a 2.0 world, even a device like the iPhone is,
in the end, a delivery system for the applications and services that consumers
value. A business model that requires systems integration by consumers to derive
maximum value isn’t working well; yet that’s exactly what we have today.

So what role does the network play? Networks are robust in many ways. First,
they are device-agnostic. The same network is capable of connecting thousands
of varieties of mobile devices, broadband modems, and even set-top boxes with

prologue | 21
the shift

ease. Second, they are pervasive. They are not constrained by battery challenges
that are often the bane of wireless devices, for example. Finally, networks are
powerful. From storage to processing power, networks are equipped to handle
the load equivalent of thousands of devices. Now, this isn’t all to suggest that
devices are less important. Quite the contrary. Device intelligence allows the
network to provide more capabilities. This is a symbiotic relationship in the
ecosystem. When devices become more powerful, so too do networks. And, in
the end, the user benefits from a richer experience.

However, this line of thinking does argue that, if one device as a platform can
attract thousands of developers, why couldn’t a network with capabilities of
reaching even more users across even more devices? Here are just a few examples
of the intelligence capabilities that could be exposed:

> Presence, or availability status, of an end user across any device or


network type
> Location of an end user, either exact or approximate, and not reserved
exclusively for smartphones with GPS capabilities but available to the
greater mass of feature phones in consumers’ pockets today. Location
can include geofencing capabilities that detect customers entering a
particular radius, perhaps within a store’s footprint, and send impulse
coupons to the customer’s mobile device as a result.
> Profiling of an end user, including what websites he regularly visits, what
channels and programs he watches, and the length of time he spends with
each type of media. For those consumer advocates reading this, we will
continuously emphasize the roles of privacy, security, and permission-
based data collection as cornerstones of any business model throughout
this book. For now, we will summarize by saying that consumers must
remain in control of their profile and explicit opt-in consent must be
granted to ensure the user is protected. However, for those willing to
offer some data about their habits in exchange for more targeted offers,
entertainment or communications options, the benefits are tangible.
> Quality of Service (QoS), which can optimize an end user’s viewing
experience by adapting network performance. The Internet has been
characterized as a best-effort medium. In other words, an end user’s speed

22 | prologue
the shift

can fluctuate depending on network performance. QoS automatically


tunes a network to provide better performance—or more horsepower—
when a consumer needs it (for example, when temporarily downloading or
streaming a video clip). Imagine this capability on a mobile network, where
video transmission can be boosted and content automatically formatted
and optimized for consumption through a smaller mobile form factor.
> Storage, which has been popularized by network-based approaches led
by Amazon and others. The service provider in this equation offers the
capability to distribute this storage closer to the end user. The more
distributed the network-based storage of content becomes, the better
the end-user experience. Think of it this way: It takes far fewer hops
across the network to download a video located closer to the end user.
The fewer hops, the faster the transmission. And service providers have
strategic storage assets located at the edge of the network, in many cases
even extending into the consumer’s home.
> Security, which can translate itself in a variety of ways. Perhaps most obviously,
the network can create a secure tunnel—or Virtual Private Network (VPN)
type of connection for those familiar with enterprise communications—that
can be maintained across a single session as a user switches devices.
> Billing, which can manifest itself in the ability, for example, to charge
micropayments directly and securely to an end user’s service provider bill

In short, this worldview is about exposing capabilities in the network in a managed


and controlled way to a broad developer community. We call it “application
enablement” in that the network enables smart functionality that delivers greater
value to multiple stakeholders across the ecosystem. Developers benefit from
robust network capabilities that can fuel their next application; network providers
benefit from new revenue streams that can fund the next wave of investment; and
end users benefit from more powerful and richer applications.

You may find yourself criticizing this approach in one of two ways:

> You may wonder why a developer community would need access to
these capabilities, given the proliferation of web-based application
programming interfaces (APIs) widely available through sites like

prologue | 23
the shift

24 | prologue
the shift

ProgrammableWeb and through devices like the iPhone and Android™


mobile technology platform. This book provides evidence based on a
quantitative study aimed at over 2,000 developers in North and Latin
America to prove interest in and willingness to pay for these enhanced
network-based capabilities.
> You may wonder why a service provider would expose the rich
intelligence of its network, given these assets have remained the bastion
of the company’s value. In short, this is not about randomly exposing
network intelligence capabilities to the Wild, Wild West of the World
Wide Web. Instead, this is about reinserting the service provider
back into the value chain, recognizing it is just one very important
stakeholder of many in a large and complex ecosystem. This is also not
about imposing onerous controls by service providers on a developer
community such that innovation is stifled; rather, it is about enabling
collaboration between these two worlds such that both benefit. This
paradigm shift does not place the burden upon the service provider
to identify and build the next killer app. Let’s face it. If history is any
indicator, this endeavor is already in the works by someone in a garage or
dorm room. It is, however, about identifying the tangible assets within
the network that could make the next killer app even better.

If we haven’t made it clear by now, let’s state this differently: The approach argued in
this book is about creating profitable and sustainable broadband models across a broad
ecosystem of content and application developers, device manufacturers, advertisers,
and service providers to create better end-user experiences. This is not about slicing
up the same pie and offering a strategy that delivers a larger slice to network providers
or developers. It’s about baking a bigger, better pie with developers enabled to create
new flavors and varieties, generating revenue for everyone. In other words, it does
not suggest service providers must profit at the expense of developers, or vice versa. It
starts from the fundamental argument that a 2.0 world necessitates an ecosystem of
interdependencies. If there is no incentive for service providers to continue to fund
next-generation broadband networks, investments will stop. Likewise, if developers
cannot find profitable business models, innovation is compromised. When one
stakeholder group perseveres without damaging the larger ecosystem, others stand to
benefit. Likewise, when one group loses, its interdependencies are also at risk.

prologue | 25
the shift

This book seeks to understand the new business models enabled through a 2.0
world, where the consumer remains in control of his experience, a developer
community benefits from enhanced capabilities, and service providers monetize
their investments to fuel future innovation. It does so with a scientific approach,
based on extensive research commissioned by Alcatel-Lucent and conducted by
Penn Schoen Berland, across thousands of consumers, enterprises, commercial
developers, and advertisers to assess their unique worldview and willingness to
pay for smart network capabilities as they look through the 2.0 lens. Further,
since research provides directional and strategic insights, but can be more
limited in precisely predicting the future, we will incorporate market examples
that lend additional support.

Since much of technology adoption is shaped by generational attitudes, we’ll


start with a look at Baby Boomers, Gen Xers, and Millennials to frame how
emerging behaviors are creating opportunity for seismic shifts in the value chain.
Next, we’ll take a look at disruptors within the ecosystem and those with the
greatest potential to shift business models: developers and advertisers. Since
value to be extracted across an ecosystem depends on addressing an unmet need
in the market, we will cover consumers and enterprises as critical components of
our analysis. And, since these end-user markets are not homogeneous blobs, we
will carefully dissect the underlying motivators and challenges unique to multiple
sub-segments, including 2.0 behavioral groups for consumers and specific
vertical industries in the case of businesses. Finally, since there is significant
economic growth in emerging countries, we will compare and contrast research
findings between North and Latin America to distinguish the nuances that
separate a mature from developing market. In the end, you as a reader should
expect a deeper understanding of the broader ecosystem implications as business
models adapt to a 2.0 influence.

Now, let’s get started.

26 | prologue
part 1

the
generational
impact
the shift

28
the shift

chapter 1

baby
boomers
the eternally
young

baby boomers: the eternally young | 29


the shift

Key Chapter Highlights


At nearly 80 million strong, Baby Boomers spend
$2.3 trillion annually, outpacing 18–39-year-olds
by 53%. Marketers shouldn’t fall into the youth
obsession trap and forget this demographic.

Baby Boomers are interested in and competent


regarding technology—particularly products and
services that serve their values and lifestyles,
including video entertainment, mobile solutions,
apps that leverage increased bandwidth to the
home, and, increasingly, social media.

Baby Boomers are redefining retirement and aging—


working longer, staying more independent, and rejecting
the notion that they should be “put out to pasture.”

In 2006, caring for aging parents took an average of


21 hours per week, which had the total economic value
of $350 billion—more than the United States spent on
Medicare in 2005. Technologies that ease that burden
have significant economic and social impact.

30 | chapter 1
the shift

> When surveying news coverage about the evolution


and future of technology, it’s easy to think that the discussion begins with
Generation X, highlights Gen Y or the Millennials, and then ends looking
forward to the next batch of youth whose name is yet to be determined—maybe
Gen Z or the proposed “Generation Alpha.” Apparently, A to Z, it’s all about the
youth when it comes to technology buzz.

Recent research by the network TV Land highlights how mistaken this approach
can be for networks, media companies, advertisers, and companies creating
innovative products and services in the technology sector.

“The widely accepted practice of primarily targeting younger consumers is just


plain wrong. There is a clear and immediate need for marketers to rethink this
approach when it comes to serving America’s 78 million Baby Boomers, who
are now in their power years,” said Larry Jones, president of TV Land, in an
announcement of the network’s November 2006 “New Generation Gap” study.1
The demarcation for the Baby Boom years varies, but generally starts post-
WWII, running from 1946 to 1964. Current estimates of their numbers vary
from 76 million to nearly 80 million.

baby boomers: the eternally young | 31


the shift

This study along with TV Land’s “Joy of Tech” study and subsequent research
seek to examine preconceived notions about the Baby Boom generation and
its approaches to entertainment and technology. What they revealed was
that many of the defining generational moments identified by Baby Boomers
involved television.

Top 5 Cultural Events


• The birth of cable television 45%
• The creation of color television 40%
• The death of John Lennon 37%
• The disco era 33%
• The death of Elvis 29%

Top 5 Historical Events


• The Space Shuttle Challenger explosion (1986) 57%
• John F. Kennedy’s assassination 52%
• The war in Vietnam 52%
• Ronald Reagan’s term as President of the
United States 42%
• Nixon’s resignation/Iran hostage crisis /
Discovery of AIDS 38% (tie)2

For Baby Boomers, their experience of the world, what they remember, and
how they remember are profoundly shaped by television. They remember
getting their first TV, the shift to color, and witnessing the nation’s most
historic moments via television. The research also revealed that only 17%
of qualifying “Baby Boomers” identified with that term.3 Baby Boomers
thought of themselves as too young to fall into the category and had negative
associations with the label. Instead, at least according to the TV Land network,
57% of respondents preferred to call themselves the “TV generation.” TV

32 | chapter 1
the shift

Land responded with an advertising campaign with the tagline, “TV Land:
TV for the TV Generation.”

A recurring theme in TV Land’s research points to Baby Boomers’ being invested


in staying current with technology as a badge of honor, a source of fun, and as a
way of staying connected with younger generations. They are not so old that the
pace of technology is as overwhelming or intimidating as it might be for their
parents, and not so young that they take it for granted. Baby Boomers enjoy
a true appreciation for the benefits of technological advancement and are still
actively involved in its creation and production.

Key statistics on Baby Boomers and communications


in 2008  4
• 74% use the Internet, up from 40% in 2000. This
comprises 36% of the Internet population and 33% of
the traffic on any given day.
• 72% own a cell phone, up from 34% in 2000
• 62% use broadband at home, up from less than 5% in 2000
• 43% connect wirelessly
• 47% use “cloud”
• 38% use video-sharing sites
• Baby Boomers and eCommerce: 81% use the Internet
to research products, 70% to make purchases, 68% for
travel reservations, and 55% for online banking

This technological interest and acumen plus their spending make them a rich,
yet underserved, target for products, services, and advertising. Baby Boomers
know this and indicated a penchant for punishing companies, networks, and
media that ignore them. At the time of the TV Land study, Baby Boomers spent
$2.3 trillion annually, outpacing 18–39-year-olds by 53%.5 And more than half

baby boomers: the eternally young | 33


the shift

of respondents in the New Generation Gap Study “claimed to pay little or no


attention to ads that they felt targeted young adults while a third said that they
were actually less likely to buy those products.”6

So what do Baby Boomers want when it comes to entertainment? According to


The Mature Market, four key things: control, choice, clarity, and community.7

Control – 28% of “Joy of Tech” study respondents indicated


timeshifting (TiVo, DVRs, and VoD) as the most important factor in
their decision to buy entertainment technologies. Like their younger
counterparts, they want to watch their content on their own timeline,
not the networks’.

Choice – Over 40% believe a large variety of content options at any


given time is “very important.” The benefit of variety was multiplied even
further in their minds by timeshifting.

Clarity – 58% listed “high quality viewing and listening” as very


important. Technologies that improve the quality and vividness of the in-
home experience have high value to Baby Boomers as they build “digital
nests” with dedicated entertainment spaces equipped with the latest
HDTVs and home theater gear.

Community – About one in four believe that “allowing connection


with friends and family” (21%) and “helping you keep up with
entertainment that friends and family enjoy” (25%) are “very important.”
Viewing content is seen as a community experience shared with family or
with people at work as water cooler talk.

Great opportunity exists to mine the buying power of Baby Boomers and their
desire for high-quality entertainment, which research suggests they are willing
to pay a premium for if it simplifies their lives and offers them greater options
and control.

34 | chapter 1
the shift

Baby Boomers and Healthcare


Options, control, and a sense that they feel younger than their age will also drive
desire for home healthcare technologies that allow Baby Boomers to remain more
independent as they age and health issues increasingly affect their quality of life.

Older Boomers are constructing a new social ethic of decline


and death, much as they did with sex and procreation in
their youth. Whereas their youthful ethos stemmed from self-
indulgence, their elder ethos will hinge on self-denial. To be
sure, much of it will be symbolic only. …[A]ging Boomers will
glorify the virtues of self-denial but personally maintain (to the
extent their incomes allow) their creature comfort indulgence.8

Whereas for previous generations, retirement was a goal and welcomed stage
of life, Baby Boomers are forming an “anti-retirement” ethic and forging a new
view of old age where they remain active and engaged in the world they so
strongly influenced—in part as a matter of principle and in part because it will
be necessary for them to maintain their lifestyles and stay in their homes.

This generation (especially its later-born members) has


experienced a much slower growth in income than the Silent
[Generation], and today faces an insurmountable lag in average
household net worth. Boomers have neither saved as much nor
been as well insured by their employers — and they expect that
public programs like Social Security and Medicare will be cut
owing to the size of their generation.9

Though they will likely live longer, by 2030 six out of ten Baby Boomers will be
managing multiple chronic illnesses, with diabetes affecting one in four.10 Today,
the first Baby Boomers are reaching retirement age and getting their first taste of
aging life in America as they care for their parents. Their experiences will drive
their own expectations when they reach elder age.

In a 2007 article on caring for aging parents, USA Today detailed the move away
from nursing homes toward living options that offer more independence, such as

baby boomers: the eternally young | 35


the shift

assisted living facilities and at-home care either at the aging parent’s home or the
home of the adult child. Beyond the costs of care, adult child caregivers, many of
them Baby Boomers, put in extended time doing what would normally be done
for them in nursing home care, including:

• Tracking care and quality of care


• Providing transportation
• Coordinating treatment plans between medical
providers
• Administering medications
• Supervising parents too ill to be left unattended
• Providing daily care such as cleaning, cooking, and
visitation

In 2006, these activities and others added up to an average of 21 hours per week
for caregivers with aging parents, which had the total economic value of $350
billion—more than the United States spent on Medicare in 2005.11

With their interest in technology and increasing integration of technology into


their homes, Baby Boomers are going to demand ways for technology to ease
these burdens for their own children and allow themselves greater quality of life
with more years of independence.

In a study commissioned by AARP and Microsoft on Baby Boomers and


technology, focus group respondents talked about some of the key healthcare
applications they want and, in some cases, are using today for themselves and
elderly relatives. One of the favorite advances was telemedicine—including in-
home consultations and monitoring. As one participant put it, “A visit to the
doctor is an entire day. [My grandmother] gets up at six in the morning to get
ready for an appointment at two in the afternoon. If we could do it at home, it
would relieve a lot of anxiety.”12

36 | chapter 1
the shift

In-home monitoring was viewed as an integral part of “aging in place” versus


having to move in with relatives or to a nursing home. In their view, in-home
monitoring would include medical devices that relay information to their doctor
and select relatives and, beyond that, monitoring of the home itself. Another
respondent said, “If there had been a monitor to tell me she hadn’t turned off the
faucet, that would have saved me about $100,000 in my mother’s apartment.”
Communications and location-based services could also help track patients
with Alzheimer’s and other conditions associated with dementia. While some
expressed concerns over the invasiveness of in-home monitoring applications,
security and control over their data and who sees it could mitigate those fears
when balanced against the greater benefits.

Many of these medical applications depend on larger advances in our national


communications infrastructure, such as:

• Increased broadband to homes to provide bandwidth


for transmitting medical data and imaging—in urban,
suburban, and rural communities
• Widespread deployment and secure access to personal
health records
• Building connected health systems that expand the
scope of care securely outside hospital walls
• Enablement of all these technologies over the mobile
network

Technology is central to reducing doctor visits, facilitating information flow to


reduce the burden of record-keeping on caregivers, and making it easier for care
to be delivered in the comfort of home. Enabling more self-directed care that is
distributed away from the hospital will be even more important since the size of
the retiring Baby Boom generation will create a vacuum of workers behind it.

According to the American Hospital Association, “In 2005, there was a U.S.
shortage of about 220,000 registered nurses; by 2020 that gap will be over one

baby boomers: the eternally young | 37


the shift

million. The nursing shortage is caused by both increased demand and by the
aging of the nursing workforce—nurses are Boomers too.”13

The impact of new approaches to care and the role of application enablement
will be discussed in the chapter on healthcare, but with regard to the Baby Boom
generation, delivering consumer-side healthcare applications and extending advanced
communications services to the home are of vital social and financial interest.

Grandma’s on Facebook?
Of course, Baby Boomers won’t be connecting with family just to share their
fasting blood sugar readings in the morning. They also have a strong desire to
find out what’s going on in their families’ lives and stay connected to children
and grandchildren. The desire for connection has driven a growing number of
Baby Boomers to join online social networks.

Their use of social networking sites certainly lags behind that of their younger
cohorts, but Baby Boomers are a growing demographic. In a 2009 Pew survey,
20% of younger Baby Boomers (aged 45–54) reported using social media,
compared to 9% of older Baby Boomers (aged 55–63). Most of those are users of
Facebook, which is the dominant networking site for older adults.14 In January
2010, adults over the age of 55 were Facebook’s fastest growing age group, up
tenfold year over year.15

The AARP/Microsoft study found three drivers for Baby Boomers’ use of social
media: connecting with family, connecting with friends (old and new), and
business networking. As they look to work longer in an uncertain economic
climate, they see social media as a way to stay in touch with colleagues and find
new opportunities.

As more Baby Boomers joined their children’s social networks, pundits


speculated about whether this actually would signal the end of networks like
Facebook and Twitter. One idea is that younger people would flee once they
realize Grandma is reading their status updates and checking out their party
pics. As we’ll see in our discussion of Millennials, this is not necessarily the case.

38 | chapter 1
the shift

They are much more accustomed to parental involvement. One of the defining
characteristics for the younger generation is its members’ willingness to share
information with less concern about blocking off their personal lives from their
professional lives and their families. Plus, they are already learning to adjust what
they put online, understanding that privacy limitations on a social media site
don’t mean that their data isn’t out there, somewhere, forever. Another idea is
that the coming of the Baby Boomers signals the coming of commercialization
and corporate influence and reduced utility as a “private playground” for the
young. So far, that has yet to happen. In the same period from January 2009 to
January 2010, Facebook use is still growing in the younger demographics, up
more than 50% for ages 18–24 and up 88% for ages 13–17.

Though a few early adopters may jump ship as a social network


that was once on the electronic frontier gets swallowed up by
digital suburbs, most stick around—at least until a major new
network arrives to supplant the old one, as Facebook has done
with MySpace.16

Baby Boomers are mobile!

“94% of iPhone owners are over the age of 18 and an


astounding 74% of them are over the age of 25!”
Excerpt from a 27-year-old’s blog on iPhone application development

The blogger quoted above was postulating that iPhone game developers don’t
know their audience and, after doing research to prove or disprove his theory,
he discovered the “astounding” truth via stats from AdMob. The February 2010
stats are slightly different. Now, 87% of iPhone owners are over 18 and 75%
over age 25. This shouldn’t be shocking. Owning an iPhone is still relatively
expensive—both the device cost and data plan—and the number of people
under the age of 18 who can afford one or whose parents trust them with such a
device is understandably low. It’s a device for those with their own jobs and their
own discretionary income, which brings us to a truth that goes even further:
One-third of iPhone owners are over 45 and 14% over 55.17

baby boomers: the eternally young | 39


the shift

Putting It All Together


Wielding over $2 trillion in purchasing power, Baby Boomers will not be
ignored. Providers, developers, and advertisers seeking to earn their fair share of
this market should note the following:

> Baby Boomers are living longer, more productive lives. They will not be
put out to pasture. They are America’s idealists—the eternally young.
Those that allow the Boomers to reinvent themselves with applications
aimed at continuous development will reach the pulse of this generation.
> Further, with Baby Boomers increasingly caring for elderly parents
and growing older themselves, healthcare applications that meet two
seemingly contradictory needs—the desire for independent living
married with continual clinical observation—all within an increasingly
compressed budget, will find favor among this lucrative market.
> Baby Boomers crave simplicity. Providers and developers should avoid
overcomplicating value propositions. This generation is the most time-
starved of all as they care for elderly parents on one end and Millennials
on the other, with about one in eight of the latter over the age of 22
having “boomeranged” back home during these recessionary times.18
They expect consistent and superlative support (remember, these are
the architects of the TQM era) and providers would do well to listen.
Otherwise, they will quickly find themselves out in the cold among a
generation that does not place brand loyalty above performance.

However obvious the buying power of Baby Boomers should be, it bears repeating.
Just as advertisers and TV networks need to realize it, so too do application
developers and service providers. Baby Boomers are living longer and will remain
a ripe market for advanced applications that fit in with their goals, values, and
lifestyles for some time to come.

40 | chapter 1
the shift

X
chapter 2

gener-
ation
america’s
middle
children

generation X: America’s middle children | 41


the shift

Key Chapter Highlights

While a smaller generation, the approximately


60 million Generation Xers are now coming into
their own, reaching the age where they are taking
the reins of corporate and political power. Gen-X
leadership will be marked by its pragmatism and
lack of sentimentality regarding institutions and
traditions. They want things how and when they
want them, without regard for inherited systems and
ways of doing things.

“They are already the greatest entrepreneurial


generation in US history; their high-tech savvy and
marketplace resilience have helped America prosper
in the era of globalization.”

With Generation X, technologies that transformed


the business world moved into the mainstream
consumer world—email, messaging, mobile phones,
and video conferencing.

As workers and as consumers, the Gen-X ROI is


“return on involvement”—value for not only their
money, but also their effort, energy, time, and
loyalty.

“As consumers and parents on the demand side


and entrepreneurs and CEOs on the supply side,
Xers will seek new ways of removing professional
middlemen (lawyers, accountants, brokers, advisers)
from business transactions. Those along the chain
who don’t add essential value may be squeezed out.”

42 | chapter 2
the shift

> Generation X is in many ways America’s generational


middle child. Numbering around 60 million born between 1965 and 1980 (with
some experts ending the demarcation as early as 1976), it is caught between two
large and influential generations—from 76 million to 80 million Baby Boomers
and 80 million Millennials.

In a 1990 article about the newly adult Generation X, Time Magazine declared:

So far they are an unsung generation, hardly recognized as a


social force or even noticed much at all. ‘I envision ourselves as
a lurking generation, waiting in the shadows, quietly figuring
out our plan,’ says Rebecca Winke, 19, of Madison, Wis. ‘Maybe
that’s why nobody notices us.’19

Generation X was the first generation of children born during the new period
of legalized abortion, birth control, increasing divorce rates, and economic
instability that laid off their parents. As a result, this “baby bust” generation
distanced itself from the idealism of their Baby Boomer parents.

generation X: America’s middle children | 43


the shift

Xers learned early on to distrust institutions, starting with the


family, as the adult world was rocked by the sexual revolution,
the rise in divorce, and an R-rated popular culture. With their
mothers entering the workplace before child care was widely
available, many endured a latchkey childhood.20

Whereas the coming Millennial generation would grow up in a child-centric society


with increased parental participation and supervision, Generation X is defined by
the lack thereof. As a result, Gen X gained a reputation of “hardening pragmatism,”
self reliance, and, as they aged, cynicism and apathy. By the 1990s, Baby Boomers
were sounding the alarm that this new “slacker generation” would never be fit to lead
the nation, and the specter of Gen X slacker ambivalence was reinforced in popular
culture by movies like Clerks (1994), Reality Bites (1994), and—of course—Slacker
(1991). Early analysis of Generation X consistently used the terms: latchkey kids,
morally ambivalent, alienated, distrustful of authority, lonely, and lost.

In 2007, author Patrick Neate wrote a defense of the “slacker generation” as


it reached middle age, arguing that despite its reputation, Generation X is a
generation of ingenuity and creativity, particularly with regard to technology.

I’m not suggesting we invented the internet. We didn’t. Nor


are we its natural heirs, which is a benefit bestowed on our
successors. We were, however, the brave foot soldiers in
the forgotten years before victory was inevitable. Look at
it this way: it wasn’t the Baby Boomers nor those young
whippersnappers from Generation Y who tried to download
movie clips over a 9600bps connection; it was us. And it took
hours and the connection kept dropping and the clip was
pixellated to incoherence, but we kept the faith.21

And contrary to the slacker moniker, Generation X met the new technology
with adaptability and independence, which drove the entrepreneurial spirit
behind the tech boom days of the 1990s. Gen X slaved away, Neate says, working
“80-hour weeks for the noble goal that one day everyone might have access to
affordable pornography.”

44 | chapter 2
the shift

Pornography aside, Generation X drove technological and cultural change that later
generations will take as a given. When Gen X entered the workforce, they brought
their desire to work more independently and without rigid hierarchical structures.
They rejected the “put in your time and get your gold watch” model for employee
advancement because they know there’s no guarantee of the gold watch. Gen Xers
believe loyalty is for themselves, their friends, and their families—not their companies.

The work relationship is driven by even exchange and mutual benefit, which they
expect to payoff now—not in 50 years when they retire. As illustrated by the dot-
com boom days, they would work extraordinary hours in the hope that there was
extraordinary pay off in the end. If the balance tips away from serving their purposes,
Gen Xers have a roving eye career-wise, and that has earned them accusations of
disloyalty and selfishness from previous generations. Over time, however, Gen Xers
have changed the work place, as noted by generational observers Neil Howe and
William Strauss in a 2007 article in Harvard Business Review.

In jobs they prefer free agency over corporate loyalty, with


three in five saying they someday ‘want to be my own boss.’
They are already the greatest entrepreneurial generation in U.S.
history; their high-tech savvy and marketplace resilience have
helped America prosper in the era of globalization.22

Employee development, expanded individual benefits, and discussions of work-


life balance are now de rigueur in the corporate world, bringing about flex time,
flatter organizations, and a focus on getting the job done as opposed to putting
in the hours. This new approach influenced—and was enabled by—technology.

There’s no widespread telecommuting without VPNs, email, and audio


conferencing. Add to that multimedia and mobility applications, which then
gave rise to the smartphone. These are technologies that started in the business
world and exploded into the consumer market, changing the game for everyone.

While this phenomenon has given workers incredible freedom and flexibility,
it has also, ironically, breached the boundary between work and home. The
first instance of “worlds colliding” was not your boss looking up your Facebook

generation X: America’s middle children | 45


the shift

page, it was your boss hearing your little Millennial kids in the background on
a conference call.

Generation X is about options and flexibility. As Baby Boomers retire from the
ranks of national power and Gen Xers move into their place, this approach has
profound effects, according to Howe and Strauss.

As consumers and parents on the demand side and


entrepreneurs and CEOs on the supply side, Xers will seek
new ways of removing professional middlemen (lawyers,
accountants, brokers, advisers) from business transactions.
Those along the chain who don’t add essential value may be
squeezed out. Sectors that are currently sheltered from market
forces, such as agriculture, healthcare, education, and public
works, may find their long-held positions under attack.23

As free agent workers and consumers, Gen Xers focus on end results, custom
products, and services that deliver personalized benefits and bottom-line value.
This shift is reflected in the current era of technological change. The explosion of
applications development reflects the explosion in entrepreneurialism as much
as an explosion in technology.

In some ways, the challenges facing service providers—including new entrants,


alternative delivery systems, and commoditization of their resources—reflect
the tension between Baby Boomer and Generation X ways of doing business.

The service provider network, which blossomed in the post-war era, is viewed
as a middleman. New entrants—staffed, if not run, by Gen Xers from the 1990s
tech boom to today—are saying: I have 1,000 different ways to deliver services that
go over the top and skip service providers. My goal isn’t to ensure their survivability.
If they don’t add value, then they should and will be forced out or, at the very least,
treated as a dumb pipe and classified as just merely transport.

Adapt or retire. Of course, we believe service providers don’t have to be relegated


to the role of middleman. The network provides distinct advantages in this new

46 | chapter 2
the shift

ecosystem of players. But the sacred cow is out of the barn and on its way to
the slaughterhouse with regard to needing new business models that make new
modes of service delivery profitable and sustainable.

Look at the dilemma facing the entertainment industry—movies, music, and broadcast
television. As Neate mentions, it was Generation X that started downloading video
and music files, trading them on the Internet, and bypassing the economic model of
the entertainment industry, aka stealing and fencing intellectual property.

While entertainment corporations were able to challenge piracy and illegal file
sharing, and use technology to track and prosecute enough offenders to deliver
a chilling effect on the practice, legal means of fighting the problem alone were
not enough. The corporations also had to start changing business models and
delivery mechanisms to give young consumers what they wanted at a price point
that met their demands. What did they want? Only specific songs, not the whole
album, and a personalized, portable music library.

Now consumers are starting to want the same with other types of entertainment:
TV and video on demand, online video, portable video, and video streaming to
wireless devices, time- and place-shifted video with DVRs and Slingbox® hardware.

Generation X pioneered these alternative delivery mechanisms at home as consumers


and at work as developers and businesspeople, causing ripple effects in the industry:

> The 2008 writers’ guild strike and threats of actors’ and directors’ strikes
were driven in large part by arguments over revenue from digital media
rights.
> The growth of DVRs and video on demand, trends toward online
viewing, and the rise of subscription cable have threatened the
profitability of an advertising-based TV network model.
> Financial crises of broadcast networks—revenue lost from the writers’
strike, dips in advertising revenue, and no answers yet on how to adapt
video content delivery in a way that will replace the revenue generated in
the old business model.

generation X: America’s middle children | 47


the shift

What’s next? Not just why buy the album, but why buy the TV service with
networks and shows I don’t want? A new business model will emerge. How
do you handle advertising? Do you need advertising? How do subscription fee
deals between providers and networks change? How do production studios
make enough money to continue creation of new content? Are networks as we
know them even necessary to that process?

“That’s the way the system is set up to work,” as one Baby Boomer colleague
recently declared concerning the current TV advertising/entertainment model,
will not be a sufficient answer for Generation X and certainly not for Millennials
and subsequent generations. The resolution to these and other questions will be
somewhat Darwinian. Only the fit will survive. The fit will be those that figure
out how to create profitable markets with—and this is inevitable—brand new
business models that are flexible enough to adapt to whatever the next wave of
technology and consumer demand brings.

So what applications do Gen Xers want?

Entertainment
As already demonstrated, Gen X wants portability for its media and accessibility
from anywhere, from any device. Online video use exploded with the Millennial
generation, but Generation X is now catching up, with 31% downloading
videos, compared with 38% of Millennials.24 Their desire for flexibility will also
lend itself to multiscreen video applications that allow them to control and view
their home entertainment from anywhere they have a network connection. For
example, a person could watch recorded shows while on a trip and then delete
them to clear out the DVR. Or, vacation videos could be uploaded to be seen on
the set-top box by family members back home.

Commerce
Generation X leads the generations in its use of e-commerce, including online
shopping, banking, and travel reservations. Eighty percent have recently made
online purchases, compared with 71% for Millennials and 70% for Baby Boomers,

48 | chapter 2
the shift

and 65% have recently used online banking, compared with 57% for Millennials
and 51% for Baby Boomers.25,  26 Generation X is also now entering its peak
spending years, but they are bringing their sense of pragmatism to their shopping
behaviors, particularly in the current recession. They are now defining ROI as
“return on involvement”—the return on their use of online tools, opt-in emails,
search, meal planning tools, coupons, comparison sites, etc. that are intended to
deliver information and value.

Shoppers’ experience with these tools and techniques taught


them that the time invested in incorporating the tools into the
shopping experience, i.e., more involvement in the process,
yielded a significant return (ROI) in terms of both dollar and
time savings.27

As the trend toward mobile data increases, applications that further support
their new ROI in mobile e-commerce, such as opt-in mobile advertising, mobile
couponing, and mobile wallet services, will also be attractive for the Gen X cohort.

Putting It All Together


Gen Xers are America’s most misunderstood generation. With a fraction of the
purchasing power of either their Baby Boomer or Millennial counterparts, they
are literally squeezed in the middle of these behemoths. While they may be easy
to overlook, developers and service providers should remember the following:

> With the birth of the PC and video game console during their formative
years, Gen Xers are the original technology enthusiasts.
> Gen Xers also appreciate entertainment. Remember that household
television sets began multiplying and cable channels proliferating during
their childhood years. As such, Gen Xers hold firm to the pop culture
ties that bind them (think of the nostalgic shows about the 1970s
and 1980s as evidence). This also points to a generation that values
entertainment more than their generational counterparts.

generation X: America’s middle children | 49


the shift

> Gen Xers are the “Me” generation. These are the children of divorce,
corporate layoffs, the Cold War, the bankruptcy of Social Security, and
AIDS (just to name a few). Their trust must be earned, and it is easily
lost with this segment. Minimize the fine print and allow these users to
remain in the driver’s seat (with privacy controls, for example).

Gen Xers may suffer the proverbial middle child syndrome, but those who seek
to understand the misunderstood stand to grab a piece of their $125 billion
purchasing power. And, as America’s original technology enthusiasts, Gen Xers
will push those in this value chain to earn their business, or they will simply
find ways around the traditional models, as they have done with online music
and video. If not for a share of their purchasing power, providers would be wise
to keep tabs on Gen Xers to avoid being disintermediated by them. And, that’s
enough to give this misunderstood middle child a very loud voice.

50 | chapter 2
the shift

chapter 3

Millennials
the digital natives

millennials: the digital natives | 51


the shift

Key Chapter Highlights


Many technologies have near ubiquity with
Millennials: texting, social media, wireless voice and
data, and online video. Most have no experience of
the world without portable, digital music and video.

The assumption that Millennials don’t care about


privacy is a false one. They have different views
of the boundaries between public and private and
a greater willingness to share, but they demand
transparency and authenticity.

Millennials have a strong belief in their importance


as individuals and as a collective generation. Social
networking appeals to their sense of community
and desire to share and crowdsource information.

“They’re used to multi-tasking, and have learned to


handle the information overload. They expect a two-
way conversation. What’s more, growing up digital
has encouraged this generation to be active and
demanding enquirers.” Interactivity and two-way
information exchange trump one-way, broadcast-
style communications and technologies.

52 | chapter 3
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> Digital natives. Of all the names and characteristics


ascribed to the 80 million plus members of the Millennial generation, “digital
native” strikes at the core of what distinguishes this generation from any other
that preceded it. While Generation X grew up witnessing rapid shifts from old
to new technologies, living in a world without ever doing things the “old way”
reflects a dramatically different life experience.

It’s one thing to move from vinyl to 8-track to cassette to digital compact discs to
digital online music over the course of a generation. It’s another thing entirely to
have no recollection of pre-digital music and, for some in the Millennial group,
no experience buying music that can’t be loaded onto an iPod. The rapid shift in
technology also makes it difficult to make comparisons between this generation’s
use of technology versus that of generations past.

The landscape is so different that actually asking Millennials or any


other generation what their media use is like versus what previous
generations did is impossible to do because tweeting and a lot of
these technologies didn’t exist. We don’t know what Gen Xers did
when they were 18 in terms of tweeting. We didn’t have tweeting
then. So some of the data that we can look at in other areas about

millennials: the digital natives | 53


the shift

religious attitudes, about morality, about a host of other things that


we can do longitudinally, we can’t do when it comes to media use. 28

Another key factor distinguishing the Millennial generation is what critical Baby
Boomers and Gen Xers would call “coddling,” and others might describe as more
intensive parental involvement and tailoring of family life around the children—
scheduled sports and other extracurricular activities, increased presence in the
classroom, and constant contact enabled by technology.

Some of these parents are Baby Boomers heavily affected by the advent of child
psychology and a desire to break away from the “children should be seen and
not heard” philosophy of parenting. Others are Gen X parents who grew up
as latchkey kids and who place more emphasis on work-life balance and being
physically present for their children. Neil Howe, co-author of Millennials Rising:
The Next Great Generation, says one indicator of the change in attitudes about
parenting for Gen X to the Millennials is the change in movies about parenting.
The 1970s featured demon children in The Omen, Rosemary’s Baby, and Damien.

In 1982, when the first Millennials were born, we saw the


appearance of baby-on-board bumper stickers all across
America. Right? And suddenly all those child-as-devil movies—
no one wanted to watch them. It was all these cuddly baby
movies. You remember, Baby Boom and Parenthood and Three
Men and a Baby started coming out.  29

At the same time, the baby-proofing industry took off, and the number of fathers
present in the delivery room went from about 20% to 65%. Parents of Millennials
emphasized being their child’s protector and advocate in the outside world.
“Helicopter parenting” or “defense attorney parenting” debuted first in school, then
college, and now, to the annoyance of Boomers and Gen Xers alike, in the workplace.

In a 60 Minutes report in 2007, Mary Crane, a former White House chef who
now consults with businesses on generational issues, talked about the extension
of parenting into the workplace.

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Career services departments are complaining about the parents


who are coming to update their child’s resume. And in fact, you
go to employers, and they’re starting to express concern now
with the parents who will phone HR, saying, “But my little Susie
or little Johnny didn’t get the performance evaluation that I
think they deserve.”  30

The report from Morley Safer, who predates even the Baby Boomers, chronicled
the disdain some in older generations felt for the newly employed Millennials.
Ironically, this same 60 Minutes report revealed the dangers of dismissing this
generation as soft, entitled, and without focus, self-sufficiency, or a work ethic.

In the online comments section accompanying the video and a transcript for the
report, Millennials sounded off.

I’ve been required to learn more in my first 20 years of life than


you were required to learn in the first 40 years of your life,
don’t you dare look down your nose at me. …You spent 4 years
and tens of thousands of dollars going to college, I spend 4
months and maybe $300 on books from Amazon.com and I
became equally adept. Experience is the only thing that makes
you my superior, and even that can become a liability as your
experiences in 1978 have little bearing on the reality of 2009.

We are the most world-wise and adaptable people on the planet


so far and we lived our lives being talked down to this way by
the GenX Eeyores and their stoned Boomer parents and we have
really had enough.

My generation is poised to be the best since WWII, so mind your


p’s and q’s or we’ll take away your social security.

Some of the intergenerational bickering is simply par for the course. Every
generation thinks successive generations are sending society down the tubes with

millennials: the digital natives | 55


the shift

their laxity and sense of entitlement. Each new generation thinks what went on
30 years ago has no bearing on their world. No doubt in 30 years, Millennials
will be shaking their heads at society and wondering what went wrong while
their kids call them dinosaurs.

However, their comments reveal key attitudes of their generation: focus on


globalism and connectedness, adaptability, equivalency between traditional
institutions and new modes of learning and living, and a strong belief in their
individual and collective importance. Millennials have been brought up in a
world that sought to protect and preserve self-esteem and to champion how
special each child is simply for being.

The protective “coddling” and the fears behind it could be one reason Millennials
use technology the way they do. As researcher Danah Boyd put it in a Pew
Research Center panel discussion:

What we’ve seen is the rise of social network sites at a time


where, starting really with teenagers, they’re in a social situation
where they don’t have the same kinds of freedom and flexibility
that we took for granted in older generations. … Fear has been
unbelievably pervasive in what we’ve seen with teenagers, and it’s
continued on into young adults such that a lot of teenagers that I
went and interviewed, they weren’t allowed to leave their home.

This whole thing that we grew up with, you know, be on your


bike, get home by dark kind of attitude, has pretty much
disappeared. And so fear is a huge component of it.31

The time previous generations would have spent unsupervised in physical gathering
places—soda shop, sandlot, or shopping mall—is now spent in virtual spaces via
social media and gaming. In a Pew Research Center study published in February
2010, 75% of Millennials aged 18–29 use a social networking site, and over 50%
of Millennials have been using social networking sites since 2006.32 Social media,
texting, and instant messaging also free them up to connect with friends in their
heavily scheduled and structured lives. The Pew study also highlighted that:

56 | chapter 3
the shift

Millennials are more wireless – 62% of Millennials reported


using wireless Internet away from home compared with just
48% of Gen Xers and 35% of Baby Boomers. Forty-one percent
of Millennials have a cell phone, but no landline, compared with
24% of Gen Xers and 13% of Boomers.

Millennials text more and more often – 80% of Millennials


texted in the previous 24 hours, sending an average of twenty
texts, compared with 63% of Gen Xers (twelve texts) and 35%
of Boomers (five texts)

Millennials are far more likely to have posted video of


themselves online – 20% reported doing so versus just 6% for
Gen Xers and 2% for Boomers.

The effect on technology is a reverse shift from the changes that took place as
Generation X entered the workforce. With Generation X, the desire for work-
life balance drove changes in business technology that eventually made their way
to consumer applications. With Millennials, the change is being driven the other
way. As they bring their personal selves into the workplace, they’re bringing their
personal technologies, gadgets, and philosophies with them—pushing consumer
technologies into the enterprise and changing the game once again.

Approach to Personal Privacy


Millennials are comfortable sharing more of themselves in an attempt to connect.
As we saw with the Pew study, more than three times as many Millennials as
Gen Xers reported posting video of themselves online. The ways in which they
judge what they have to lose and what they have to gain by exposing personal
information are driven by similar motivations as for youth in times past, but
with a new value placed on being noticed by their peers or maybe even the larger
world. In the world of reality TV and YouTube celebrities, being yourself—or a
more provocative version of yourself—could be your ticket to fame and maybe
fortune. Millennials balance that desire with how their behavior might impact
getting into college or getting a job down the road.

millennials: the digital natives | 57


the shift

How they weigh these elements changes depending on their social class, future
plans, and age, but the impact of social media on perceptions of how they judge
those behaviors may have already been altered.33 The assumption that “youthful
indiscretions”—to borrow a phrase from George W. Bush—must negatively
impact how you are perceived is not as readily accepted.

Many, many years ago, you wouldn’t have been able to become a
presidential candidate or a viable president if you had admitted to
drug use. And then we had Bill Clinton who didn’t inhale and then
onward and onward with George Bush and Barack Obama. And so
we’ve shifted in our values and attitudes toward that and toward
what makes you an authentic young person.34

Millennials place a high value on transparency and authenticity. Their commitment


to being themselves entails being more open. In the past, information that you
shared in a physical gathering place—such as the school yard—would be private by
default, public through effort. The secret shared with a friend could only become
public with an active breach of trust. In the virtual meeting place, information is
public by default, private through effort. This is the system in which they grew up.
They are also accustomed to high levels of structure and supervision. The threats
of Columbine and 9/11 introduced new levels of security and surveillance, and
they have accepted these measures in the interest of safety.

Their natural inclination toward openness is changing the rules for everyone. A
2009 Monitor Group report looked at Millennials on the job.

Perhaps the most radical impact of Millennials on the workplace


will be triggered by their inclination to freely share private
information and their expectation that others will reciprocate.
… Human resource policies and, to a greater extent, managerial
practices, tend to assume that people won’t talk about salaries,
bonuses, and other intimate details of their employment
relationship. That assumption won’t be safe as Millennials
come into the workforce with a decade or more of exposure
on MySpace, Friendster, Facebook, and other social networking

58 | chapter 3
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sites. There’s already evidence that they will openly share salary
information, coaching conversations, and development plans—
testing the integrity of the organizational systems.35

So what do they want with regard to privacy? Again, transparency. Personally,


this means: Be yourself and be who you say you are. Technologically and in
business, this means full disclosure and consistency of policies so that users are
in control of their information.36 It means clear choices to opt in and opt out. It
means when something changes, they are notified in plain language about what
has changed and how they can adapt to maintain a comfortable level of privacy.

Everything is a Two-Way Street


To the Millennial, life is about connection, exchange, and collaboration. Social
networking. Crowdsourcing. Mashups. Comments sections on news sites. They
have grown up in a world where they don’t just consume media, they actively
interact with it. They expect their voice will be heard and that it carries weight.
Information coming down from authoritative voices on high is likely to be
questioned and weighed along with their own thoughts, experiences, and research.

For example, the traditional classroom format, particularly traditional for colleges and
universities, is going out the window. Students no longer respond to being talked at for
an hour while they furiously take notes. Not only do they want a more interactive and
collaborative learning experience, they are now conditioned to be more responsive to
this type of learning by their experiences with the Internet and new communications
technologies, a topic we will explore further in our chapter on education.37

Recent conversations in the ivory tower have surrounded whether Millennials’


penchant for multisourcing information is a good thing. One professor at Emory
University, Mark Bauerlein, went so far as to write the book, The Dumbest
Generation: How the Digital Age Stupefies Young Americans and Jeopardizes Our
Future (Or Don’t Trust Anyone Under 30). In the article, “Is Google Making Us
Stupid?” Nicolas Carr questions whether we are turning into the movie 2001,
where “as we come to rely on computers to mediate our understanding of the
world, it is our own intelligence that flattens into artificial intelligence.”38

millennials: the digital natives | 59


the shift

Don Tapscott, author of the 1999 book Growing Up Digital and the 2008
follow-up Grown Up Digital, responds to sentiments like these in an article
posted in the online publication Edge.

My research suggests these critics are wrong. Growing up digital


has changed the way their minds work in a manner that will help
them handle the challenges of the digital age. They’re used to
multi-tasking, and have learned to handle the information overload.
They expect a two-way conversation. What’s more, growing up
digital has encouraged this generation to be active and demanding
enquirers. Rather than waiting for a trusted professor to tell them
what’s going on, they find out on their own on everything from
Google to Wikipedia.39

Whether Tapscott is correct that Millennials’ brains have so quickly evolved


to function as he describes, the fact remains that they have expectations for an
interactive experience in nearly all aspects of their lives, which means, Tapscott
argues, the academy is in need of big changes.

In the industrial model of student mass production, the teacher is


the broadcaster. … The formula goes like this: “I’m a professor and I
have knowledge. You’re a student, you’re an empty vassal, and you
don’t. Get ready, here it comes.”

The broadcast model might have been perfectly adequate for
the Baby Boomers, who grew up in broadcast mode, watching
24 hours a week of television (not to mention being broadcast
to as children by parents, as students by teachers, as citizens by
politicians, and when they entered the workforce as employees
by bosses). But young people who have grown up digital are
abandoning one-way TV for the higher stimulus of interactive
communication they find on the Internet. In fact television viewing
is dropping and TV has become nothing more than ambient media
for youth—akin to Muzak. Sitting mutely in front of a TV set—or a
professor—doesn’t appeal to or work for this generation.

60 | chapter 3
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Tapscott’s comparison between traditional college lectures and broadcast television


is an interesting one. His goal is to point out how universities must change to avoid
obsolescence. However, it’s questionable whether broadcast television itself has
even prepared for the shifting attitudes and behaviors of the viewing audience.

While we would disagree that Millennials are abandoning TV altogether,


Millennials do want a more interactive and mobile entertainment experience.
Interactivity plus the same preferences for seamless time- and place-shifted media
that older generations want are going to be differentiators in the near term and
table stakes over the long haul. As one Pew researcher put it, young people are
“not interested in the old delivery systems.” If they have “a delivery system that
meets their behavior, their needs, their personality, they’re avid consumers.”40

Putting It All Together


As the first generation to grow up with digital media, social networks, and
online games, Millennials are the most likely to be associated with technology
adoption, and for good reason:

> Millennials share the idealism of their Baby Boomer parents. They are the “We”
generation, fully connected and socially conscious. Technology is immersive to
them—an extension of themselves. And, they are using the technology for far
more than just checking what their buddies ate for breakfast. Cause marketing
has a viable role to play among these idealistic activists.
> Millennials are acculturated to multitasking. They will not sit idle in
front of a television for hours at a time as their Gen X predecessors
did in their youth. Nor will they spend all of their time isolated in
front of a PC. No, for this generation, it’s about multiple media
simultaneously. They pay with more than just their wallets. They pay
with their attention. If providers can grab and keep it longer than
their competition, they stand to inherit their share of $200 billion
in Millennial purchasing power (not to mention the portion of Baby
Boomer spending Millennials also greatly influence).

millennials: the digital natives | 61


the shift

> These are the original prosumers. That is, they are both consumer
and producer—of their online environment and of the services they
use. Opportunistic providers and developers will tap into this highly
collaborative segment to allow them to not only sound off about
brands, but to help create new services.
> This is the first generation to compete in a global economy. Technology can
help narrow the achievement gap currently facing the United States
when compared with its global peers. Expect the implications to the
education sector (both K–12 and higher education) to be significant.

Millennials live in their own world—one they create and shape every day in their
2.0 environment. They are consummate collaborators, wide-eyed idealists, and
multitasking machines. They do not know of a world without digital media,
broadband, or on demand and, as such, they are the most demanding for content and
communication on their terms. Eighty million strong helps explain why this market
captures the majority of headlines. Now, if only capturing their attention was as easy.

62 | chapter 3
the shift

part 2

the 2.0
ecosystem
stakeholders
the shift

64
the shift

chapter 4

the
developer
market
14 million creative
minds and counting

the developer market: 14 million creative minds and counting | 65


the shift

Key Chapter Highlights


Developers are significant players within a 2.0
ecosystem. Opportunistic providers are best served
leveraging—rather than attempting to compete
against—this growing army of talented creators.

End users are placing incremental pressures on


service providers to innovate quickly. A service
provider attempting to discover the next killer app
on its own will find itself hard-pressed to respond to
an increasingly fickle customer base.

At the same time, developers are multiplying in


numbers. By exposing network-based capabilities
that serve to enrich the development process,
service providers can tap into the creative muscle of
this market to create new services efficiently.

Service providers attempting to attract developers


must speak their language. Web-based protocols
are the norm. Service providers must ensure
network-based capabilities are exposed through this
type of common framework to attract the greatest
number of potential developers.

66 | chapter 4
the shift

> In North America, a developer is born every 8 minutes.41


Not physically, of course, but where more and more of our lives are spent—in the
virtual world. That means that, in about the time it takes you to read this chapter,
another individual will be entering the developer ranks in North America.

At the time of this writing, there are:


> Nearly 2,500 Application Programming Interfaces (APIs) on
ProgrammableWeb.com, comprising over 5,000 mashups
> An estimated 14 million developers worldwide in various disciplines,
with over 6 million involved in Web 2.0 development42
> Nearly 275,000 developers on TopCoder.com—a site that epitomizes the
definition of “crowdsourcing” (more on this later)

We could go on with a list of seemingly endless statistics. All point in one


conclusive direction: The application developer market is exploding and its peak
is currently nowhere in sight. To support this growth, macroeconomic conditions
must sustain a viable business case—one based on increased revenues and/or
decreased costs—and an infrastructure to enable development. Respectively,
these factors are satisfied by exponential end-user demand, the crowdsourcing
groundswell, and a movement toward web-based services. Let’s look at each one.

the developer market: 14 million creative minds and counting | 67


the shift

Exponential End-User Demand


We have already extolled the virtues of Apple with its release of the iPhone, and,
at the risk of being branded Apple zealots, we must once again point to a more
recent case study that demonstrates just how fast user appetite is growing and
changing. On April 3, 2010, Apple debuted its latest “it” device, the iPad. With
a 9.7-inch touchscreen and multiple wireless connectivity options, the iPad
set the new benchmark for the connected appliance category. And consumers
responded in droves, the way they had to the iPhone, but with even greater vigor.
In its first month of launch, Apple sold one million iPads at an average purchase
price exceeding $500. To put this in perspective, it took the iPhone more than
twice as long to reach the same unit penetration at a lower price point just 2 years
ago. It took almost 2 years to reach the same penetration with the iPod. Further,
the iPad generated more than 5,000 applications and over 12 million downloads
in its first month alone. These impressive results helped Apple attain over
$2 billion in sales for the iPad in the quarter it launched. In comparison, the entire
company generated $1.8 billion in quarterly revenues just 10 years earlier.43 And,
it would appear this is only the beginning of the iPad’s meteoric ascent. Piper
Jaffray analyst Gene Munster recently predicted Apple will sell 21 million iPads
in 2011. If correct, that would place iPad sales above Mac PCs—just one year
after the former’s launch.44

Early ripple effects into the competing netbook category had some analysts
questioning how far the iPad could go in making device alternatives all but
obsolete. As an example, the annual growth rate for netbooks cratered from
641% the year before the iPad’s introduction to just 5% growth the year after.
Barclays Capital recently predicted the iPad’s momentum would place downward
pressure on netbook price points from just over $300 to sub-$200.45 Beyond
impacting netbook growth, Morgan Stanley found iPad consumers to be former
prospects for multiple device categories, some of which are still nascent on their
own: 17% selected an iPad instead of a portable game player, 28% instead of an
e-book reader, and 44% instead of a laptop.46

Beyond the sheer numbers of buyers, applications, and downloads, the


willingness to pay is also on the uptick. At an average price of $650 (including
accessories), reaching one million iPad sales in its first month by itself is

68 | chapter 4
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impressive. However, throw in the application downloads, and you once again
have an ongoing revenue stream that exploits an evolving business relationship
with these users. As evidence, not only are iPad customers willing to pay more
for the device but also for the downloads when compared with their iPhone
counterparts. According to a study by analytical firm Distimo, the average price
of an iPad application is $4.67—22% higher than the average of $3.82 for the
iPhone. Further, the study suggests that the ratio of paid applications on the
iPad exceeds that of the iPhone, with 80% available at a price for the former
compared to 73% for the latter.47

What does it all mean? Many of us have grown up in a time where reaching
critical mass for a particular service or device meant considerable marketing
muscle over several years (for example, it took the mobile phone 20 years to
reach 10% penetration of US households). In today’s world, years have been
replaced with months. With the iPad’s current trajectory, it will reach the
10% penetration threshold in less than a year. And, current user behavior is no
longer a reliable predictor of future consumption. As consumers migrate to the
iPad, willingness to pay for applications increases. You could argue that this is
a function of a more early adopter profile for the device combined with a larger
form factor that provides fertile ground for higher-priced multimedia gaming,
entertainment, and business applications. Or, it could also reflect the changing
appetite patterns as consumers drift toward a new connected device category.
In any case, assumptions based on historic consumption are only as valid as a
relatively unchanged communications landscape. And, as we have seen with the
seismic shifts with just one company in only one decade, these assumptions are
less relevant every day.

Clearly, with over $2 billion in quarterly sales from one device alone,
consumption translates to topline growth for Apple. And, while the ongoing
sales of applications provide future revenue potential and supplement the one-
time revenue boost of selling the device alone, the proportion of revenues earned
through the iPad app store pale in comparison to its hardware sales. This is due,
in large part, to the relatively small portion of revenues Apple collects with the
sale of each application—30%. This 70/30 revenue split between Apple and its
developers has become so popularized, thanks to the company’s success with

the developer market: 14 million creative minds and counting | 69


the shift

the iPhone, that few even mention alternative business models, though others
certainly exist. In Apple’s case, 12 million monthly downloads at an average
price of $4.67 for the iPad, multiplied by its 30% cut of the revenue, equates to
approximately $50 million back in the company’s coffers for the quarter. While
this is respectable for one quarter’s work, it’s a pittance in comparison to the
$2 billion in quarterly sales the company collected in iPads alone.

And, when you wring out costs, the profits from Apple’s App Store are even
slimmer. According to an analysis by Piper Jaffray, Apple’s App Store has
generated less than 1% of the company’s overall profits since it opened its virtual
doors in June 2008. Analyst Gene Munster estimates that sales since launch have
been $1.43 billion, of which Apple takes 30%. Excluding costs associated with
credit card transactions, storage, and delivery, gross profit generated through the
App Store has been $189 million—compared with the company’s overall gross
profit of $33.7 billion over the same period of time.48 Clearly, Apple’s business
model is built upon using its popular App Store to pull through demand of its
devices—not a bad business model when one has a hardware horse in the race,
and, one where a 30% cut of the revenues is easily justified in an attempt to
attract more developers to an already growing app storefront.

Apple has recently introduced additional revenue-sharing options for


advertising and virtual currency. Again, the lion’s share of revenues earned will
be deposited in the developer’s bank account. Though Apple certainly stands
to earn incremental revenue with this approach, it will be some time before the
sales collected through the App Store come close to rivaling those derived from
hardware. Apple’s model is one of differentiation: favorable developer pricing
yields a greater number of applications, which attracts end users with evolving
appetites. This is just one example of how escalating demand has been satiated
by tapping into a new army of developers ready and willing to create their next
masterpiece for fame or fortune.

The Crowdsourcing Groundswell


In June of 2006, Wired magazine printed an article, “The Rise of Crowdsourcing,”
a term coined by writer Jeff Howe. While burgeoning end-user demand delivers

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increased revenue potential, crowdsourcing is a means to address resource


constraints. Now more than ever, companies are facing the challenge of doing more
with less. Typically, expense budgets found in “discretionary” projects, including
those in IT, are at risk of elimination or, at a minimum, reduction. Despite these
challenges, the normal development life cycle has not changed materially. To
develop a new service or application, consider the following as a new take on the
traditional twelve-step program (compliments of www.dummies.com):

1 Develop the idea.


2 Decide upon the target market or typical user profile.
3 Make a hardware choice for output and identify
associated requirements.
4 Pick one or more programming languages.
5 Design a prototype of the program or service.
6 Write the program.
7 Test the program (also known as alpha testing).
8 Debug any problems identified through alpha testing.
9 Distribute test copies for people, or “friendlies,” to
test (also known as beta testing).
10 Debug any problems identified through beta testing.
11 Release the program or service to the general market.
12 Continue with the debugging process for any
unforeseen issues following rollout.

Now, the length of time to progress through this entire cycle varies with the
complexity of the program or service being introduced. But, the cycle itself
reflects the rigor associated with a successful launch.

While enterprise IT budgets are being scrutinized or slashed, the web


development community is booming. This dichotomy represents a fascinating
inflection point for companies and is reflected through a concept derived from
another famous Wired article, “The Long Tail.” Wired editor Chris Anderson
identified and coined this phenomenon, which explores how the challenge of
scarcity is addressed by a virtual economy. In a brick-and-mortar world, we
are challenged by physical constraints. These constraints are manifested by

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the shift

practical economic limitations. For example, physical stores have limited shelf
space in which to stock items. As such, more popular items tend to win favor
over less popular fare. But, in the virtual world, the aggregate sales of these
less popular items outnumber the sales of the bigger hits, and the incremental
cost of offering these niches becomes palatable in an economy unencumbered
by physical constraints. The millions of niches that result comprise the now
famous “Long Tail.”

Though that example reflects the way a virtual world addresses physical constraints
to attract greater niche markets, its underlying premise involves scarcity. Just
as scarcity exists in a physical retail environment, it is also represented in the
enterprise IT resource constraint challenge referenced earlier. That is to say, just
as the “Long Tail” allows retailers to offer more in a virtual world, it also can be
applied to companies seeking to offer more services and applications by tapping
into a virtual economy of developer resources.

Enter crowdsourcing communities like TopCoder.com. On TopCoder,


companies can tap into an army of nearly 275,000 developers from a variety of
disciplines. Companies post a challenge to the community—for example, to
create a new application or service. Developers respond with their solution or
program. The community then vets the responses to help select the winners, who
are compensated with cash or prizes by the company. The enterprise benefits by
establishing a clearly defined price and timeline for its development project. It
is guaranteed not to exceed budget parameters given the pay-for-performance
business model employed. Further, since the company can tap into the large and
growing community of talent, it circumvents the traditional recruiting process
and bypasses the need to rely upon its own scarce IT resources to accomplish the
task. Developers are rewarded with remuneration and respect by their peers (an
important psychological by-product we will explore in the next chapter).

Not only does the company benefit with a project that is guaranteed to come
in on time and within budget, it also gains the critical and elusive speed-to-
market advantage. No matter how smart or talented a company’s development
resources may be, it’s difficult to compete against nearly 275,000 soldiers—and
that’s representative of just one development community. This comes down to

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numbers—both dollars and cents and brilliant minds. A company would be


hard-pressed to compete with the millions of developers in the marketplace.
TopCoder’s premise is simply brilliant: Instead of competing against this virtual
brain trust, leverage it. Both supplier (developer) and consumer (company)
benefit and voilà—we have another innovative business model at work, one
that addresses the growing organizational challenges faced by enterprises
every day—and another macroeconomic factor that helps explain a booming
developer marketplace.

The Web-Based Services Movement


We’ve covered how supply and demand factors shape an accelerating developer
marketplace. But, without an infrastructure to enable and support said
development, it’s a bit like putting the cart before the horse. In other words,
what has changed in the past few years to catapult us into this brave new world
of development? Look to the enterprise for a trend that started well before
this development movement inspired millions: the birth of service-oriented
architecture (SOA).

In the spirit of full disclosure, neither author professes to be an expert in


programming architectures or languages. Despite this, the principles of SOA
are straightforward and logical. Originated in the enterprise, SOA was a means
to accelerate and simplify the intricacies of development by modularizing the
approach. For those in the audience who lack technical depth as we do, let’s turn
to Wikipedia for a brief explanation. In order to meet the requirements for SOA,
interoperability between different systems and programming languages allows
integration between applications on different platforms through a communications
protocol. Rather than focus on the intricate complexity of a communications
protocol, the developer is instead allowed to concentrate on the true application
functionality itself. Since SOA is based on a modular architecture, the principles
of reuse and interoperability are satisfied. Developers can accelerate the process
by leveraging the work of others—in other words, by reusing functionality from
existing software services to create entirely new applications. This represented a
breakthrough in crashing the critical path of program development.

the developer market: 14 million creative minds and counting | 73


the shift

Profound as that may be, how does it relate to the web developer market that
is the focus of this chapter? Think of SOA as the grandfather of web services.
And, web services are the fuel that propels the developer market forward. Web
services are based on APIs. An API is an interface that allows a program to
interact with other software or networks. Consider it a common language that

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enables one program to speak to another. In this way, web developers are able to
use APIs to create brand new services, consisting of mashups from previously
existing applications, and leverage the work of others to create something new.
Again, speed-to-market is attained and the developer is able to optimize his
scarcest resource—time.

In the first chapter, we referenced multiple network capabilities that an operator


could exploit, such as presence, location, profiling, QoS, and the like. Here’s where a
burgeoning developer market, propelled by a web services approach and supported
by escalating user demand, converges with service provider networks to create an
intersection of new opportunities for multiple stakeholders in the ecosystem.
These network capabilities can now be identified via web-based APIs familiar to a
development community that is programming with these tools today. By exposing
these network capabilities using a web services approach, service providers can tap
into the expertise of millions of fluent developers to create new services for their end
users. Service providers benefit by leveraging instead of competing against the time
and talent represented by a broad development community. Developers benefit by
tapping into new network-based capabilities to enhance or create new applications.
End users benefit by consuming new services that are more robust in functionality.
The result: a trifecta of macroeconomic forces that positions all stakeholders for
greater economic potential by extracting greater benefit across the value chain.

Putting It All Together


> Developers represent a growing community of critical stakeholders in a
2.0 world.
> Rather than compete against the millions of developers globally, service
providers should leverage this virtual brain trust to accelerate development
efforts and tap into unserved or underserved markets.
> Developers value their community. Reuse and recognition are accepted
norms in development circles. Service providers can exploit the
crowdsourcing groundswell by exposing their own APIs.
> Providers attempting to attract developers should look to common web-
based architectures to appeal to larger numbers

the developer market: 14 million creative minds and counting | 75


the shift

By now, your own observation of the changing environment around you, if not
the evidence from this chapter, has likely convinced you that a new marketplace
is being created through the growing development community. While
macroeconomic factors point to how such a market is created and sustained,
they do little to address the developer mindset contained therein. If supply and
demand activate this community, what passions motivate them intrinsically?
Let’s explore in our next chapter.

76 | chapter 4
the shift

chapter 5

through the
looking
glass
of the commercial
developer

through the looking glass of the commercial developer | 77


the shift

Key Chapter Highlights


The universal currency uniting all developers
is time. Service providers that understand this
underlying motivator and create value propositions
to accelerate the development cycle will find a
receptive market.

Service providers should employ the “3 Comms”


model in targeting developers:
• Communication of network-based capabilities
should be in a construct familiar to developers.
• Community should be acknowledged and
respected.
• Commerce can go beyond billing of services
to incorporate marketability of a developer’s
application.

Despite the proliferation of free APIs available today,


developers are attracted to and willing to pay for
network-based capabilities that enrich development.
This finding suggests service providers have a right
to play in a new 2.0 value chain.

There is also a place for a variety of business models


aimed at the developer community. While the
70/30 revenue-sharing model has been popularized,
developers prefer alternatives, such as properly
priced per-dip models, in some cases. Further,
bundles comprising web- and network-based APIs
represent an opportunity for a new business model
overwhelmingly favored by this audience.

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> Those of us in marketing appreciate the importance of


understanding what motivates a buyer. As consumers, we are bombarded with
thousands of marketing impressions each day with advertisers eager to target
these costly messages to those of us most likely to buy. This goes beyond ability
and willingness to pay. As many marketers will admit, once one understands
the motivations and passions of the target market in the context of the product
or solution offering, relevant messaging, go-to-market support, and value
propositions soon follow. The correlation to increased sales is not far behind.
At the end of the day, you must understand your target—not just in the simply
identifiable external demographic categories, but in the more complicated
intrinsic motivating factors. In the case of the developer, this involves a deeper
understanding of that specific worldview.

In 2009, Alcatel-Lucent explored developer attitudes toward leveraging the


network as a platform in creating new applications by incorporating intelligent
capabilities such as presence, profile, and location of end users. The premise
was straightforward: These developers used APIs in their efforts. Would they
care to procure new API functionality from a network provider? Could the
latter actually offer something uniquely valuable that was not already available
through other alternatives? Remember, we live in a world where thousands of

through the looking glass of the commercial developer | 79


the shift

APIs are readily available—whether one wants to develop for a device, such as
the iPhone or Droid, or aspires to create a new web mashup using APIs on sites
such as ProgrammableWeb.com. If APIs are ingredients and the end product
is a new service or application, did the service provider have a right to play in
this space by exposing its own network-based capabilities to a fluent developer
community? Before we could answer the question, we had to delve into the
developer mindset. What were the current pain and entry points for a new
contender to gain a foothold?

The Commercial Developer’s Currency: Time


Not all developers are created equal. Their end product varies depending upon
their orientation. For some, development is a hobby with fame being more
important than fortune. For others, the opposite prevails. And, for others,
their output is the direct result of the enterprise for which they work; think of
these individuals as IT professionals developing new applications for their
company. While the motivating factors governing each of these developer
groups vary significantly, one common currency unites them: time. Note
that money is not the common denominator. A developer could build his
creation without paying one tangible cent due to the widespread availability
of free APIs. But, time is a consistent factor of investment, whether the
pursuit is as a hobby or career ambition, for fame or for fortune. Therefore,
before a provider can convince a developer to open his wallet, it must first
convince him to afford it his effort.

If time is the common currency, then motivators surround crashing the


development cycle. As we consider the development process covered in the last
chapter, the mantra of the “3 Comms”—Communication, Community, and
Commerce—helps accelerate a developer’s creation.

Communication
Development is as much art as it is science. The more a provider can simplify the
relatively mundane parts of the process, the more the developer is empowered
to create. In a series of developer focus groups commissioned by Alcatel-Lucent

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in 2009, a common theme emerged: simplify communication. Communication can


be a deterrent or an attraction. As humans, we are accustomed to communicating with
one another using mutually understood combinations of sounds, symbols, gestures,
and expression. For those of us who have traveled to foreign countries, where our
language is not the native tongue, many can attest to the challenges in exchanging
the most basic of information when we don’t start from the same semiotic system. In
this case, the language barrier becomes the focus, sometimes to the detriment of the
message we are attempting to communicate. Language is a construct we use to reach
the end goal, which is to share meaning and express ourselves.

For developers, it is no different. There are countless programming languages


one may use in development. The more standard and universal the language (and
even the construct, or architecture, in which it is represented), the easier it is for
the developer to focus on his message—in this case, his application. The language
style and construct are to be used as a means to an end—a tool for designing a
developer’s creation. If a provider offers a more complex language alternative, not
only will it alienate developers who are not accustomed to the style, but it makes the
development process itself more difficult. This is not a book about programming
architectures and languages. However, one only need peruse the latest articles
on web development to find a clear movement toward lightweight architectures,
such as REpresentational State Transfer (REST), that are based on common web
principles of design. In fact, the proliferation of RESTful APIs, as they are called, is
evidenced on popular sites, such as Facebook and Amazon. The bottom line is this:
To avoid repelling developers, service providers should incorporate simple, familiar
architectures that allow developers to focus on their creation, not on translation.

Community
If architecture choices influence how a developer communicates with code
to build a new application, his exchange of ideas with others is found in his
community. The last chapter explored how web-oriented architectures allow
developers to reuse the work of others to create new mashups. In our focus
groups, the importance of community unites developers in a microcosm only
they truly value and understand. The community is what separates a developer
from a layperson. It is where ideas are exchanged, problems are solved, and peers

through the looking glass of the commercial developer | 81


the shift

are recognized. Community is therefore a powerful psychological influencer.


Explore crowdsourcing sites such as TopCoder.com (which was covered in our
last chapter) and you will quickly discover the importance of respect as a reward
that sometimes rivals remuneration itself.

You will also see community as an influencer in applications developed today.


Consider the following case in point. Foursquare is a popular mobile application with
over 3 million members that allows its users to tag locations visited. Tag a location
more often than anyone else in the community and be named Mayor of the venue.
There’s no monetary reward in play—just the opportunity to win the respect of one’s
peers. Just as community has a profound influence in the development process, it can
often be seen as an equally important factor within applications themselves—a case
where a developer’s creation is many times a reflection of his values.

While community is an indisputable heavyweight in accelerating a developer’s


speed-to-market by leveraging the ideas, talent, and work of others, it isn’t
without drawbacks. A challenge in today’s Open Source world, where the
community is the provider, is the lack of the proverbial single throat to choke
when things go awry. To whom does the developer turn when he encounters
a problem? Sure, forums provide answers. But, developers in our focus groups
certainly expressed a preference for additional support options that could stop
the buck where accountability resides. Note that service providers come from
a world of 24x7x365 support—one where answering the phone in seconds
means the difference between keeping or losing a customer or between paying
or avoiding a fine imposed by a regulatory agency. Developers come from a very
different paradigm—one where access to aggregated expertise and intelligence
found across a broad community is more important than instantaneous “support”
provided by a novice representative. Developers want something to augment, not
replace, the forums they produce and consume every day. A provider that unlocks
this code could find itself in a competitively superior position.

Commerce
Commerce is where reward is exchanged, whether the developer is interested in fame
or fortune. Here is where the developer brings his creation to market, either for sale

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or for buzz. When we asked developers in our focus groups for the more important
considerations that influence their choice of providers, responses tended to converge
around reach as a critical variable. That is, developers want exposure to as many eyeballs
as possible to have the greatest chance for success. This is not surprising.

We have been trained since youth that eyeballs matter; look no further than the
marketplace around us where advertising a product has its roots in the concepts
of reach and frequency. How many people can I reach and how frequently can
I affordably bombard them with my message before the Law of Diminishing
Returns is hit? Developers expressed this same desire in marketing their
application. To be clear, they want to build their creation once and have it available
on as many storefronts as possible. (Hence the reason providers avoiding web-
based architectures may soon find themselves out in the cold.) This is a potential
point of conflict for a service provider, which seeks differentiating applications
to retain customers. If all service providers expose the same capabilities, attract
the same developers, and thereby have the same applications available, where is
their differentiation against one another to acquire and retain customers? It’s a
provocative question and one that deserves further exploration.

First, recognize that a service provider’s desire for differentiation and a developer’s
interest in standardization may coexist. There are certain capabilities, such
as location, that are far more valuable to the marketplace when exposed and
standardized across multiple service provider networks.

Consider Short Messaging Service (SMS) as a fairly recent example of this


fact. Though hard to imagine, there was a time in the not-so-distant past when
SMS was a closed standard. That is, a mobile customer could not send an
SMS message to his friend if the two were not customers of the same service
provider. Today, we know that SMS is fully interoperable between carriers. And,
the results show that a rising tide definitely lifts all boats. The number of text
messages increased by nearly 50% nationwide in 2009 to reach an astounding
4.9 billion text messages sent and received each day, according to the Cellular
Telephone Industry Association (CTIA). And, for the first time in the United
States, the amount of data traversing mobile networks exceeds the amount of
data in cellular voice calls. Clearly, this trend is the function of multiple factors,

through the looking glass of the commercial developer | 83


the shift

including the proliferation of smartphones and other connected devices.


However, one could point to the interoperability of SMS as the first enabler of
the wireless data movement.

While standardization certainly benefits both developers and providers in some


cases, in others, differentiation of services will prevail. If a service provider is
interested in holding a particular application exclusive to its customers, it must
neutralize the reach objection offered by a developer. In other words, if a service
provider craves differentiation, what does a developer demand in exchange?

If you leap to the answer of reach, you fall victim to a classic mistake in
research—taking at face value what respondents say they want. Indeed, some
of the biggest debacles in marketing’s history (New Coke comes to mind as the
poster child) are based upon simply asking respondents what they want and
delivering the same. More sophisticated research techniques involve laddering
and revealed preference. The former is used more in exploratory research by
asking a respondent a series of “Why” questions following his initial response
(e.g., “Why do you feel that way?”, “Why is that important to you?”). The latter
is used more in quantitative research where you force a respondent to make
complex trade-offs through a series of questions to statistically determine
which variables have the most profound influence on choice.

Both methodologies are derived from the premise that respondents have latent
desires that are often masked through a filtered answer. Research respondents
don’t intend to be manipulative and certainly aren’t clueless. They are simply
often incapable of expressing the true underlying motivators to an initial
response. Alcatel-Lucent used both techniques in our developer study (laddering
in our focus groups and revealed preference in a follow-up quantitative phase).
While reach was often mentioned as a top-of-mind response, developers actually
crave discoverability. The two are not one and the same. In a sea of hundreds
of thousands of iPhone apps, one has a challenge in having his app discovered,
despite the millions of eyeballs reached by an iPhone today. Service providers
can inoculate the reach concern by offering the developer greater discoverability
alternatives—a point we will discuss later in the chapter.

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The Commercial Developer’s Hierarchy of Needs


In 1943 famed psychologist Abraham Maslow proposed his Hierarchy of Needs
to explain the underlying motivations governing human beings. The premise
was based on the hypothesis that humans require more fundamental needs to be
fulfilled first—such as the physiological needs of hunger and thirst—before we
can ultimately evolve to the epitome of self-actualization, or the pinnacle of our
full potential. The model has been used in psychology and marketing to explain
how complex decisions are made and what fundamentally drives us as human
beings and consumers.

Taking a page from Maslow’s Hierarchy of Needs, Alcatel-Lucent was interested


in identifying the same for the commercial developer. Developers make decisions
based on a complex set of variables—from the types of APIs made available, to the
type of support offered, to the price points provided, to the number of potential
customers reached. Each of these is important in the developer mindset—but
there are those that are more important than others.

Our goal was to identify the underlying Hierarchy of Needs that addresses how
developers actually make decisions when asked to trade off these variables. To
do this, we used an experimentally based research design conducted among
1,300 commercial developers in North America (over 1,200 of whom are in the
United States). In our discrete choice exercise, developers were asked to select a
preferred bundle from multiple sets of two options. Each bundle was composed
of differing APIs, support options, price points, and reach. After having each
developer complete this exercise several times, we were able to identify the most
important variables on a developer’s choice through a complex statistical analysis.
Because this design forces the developer to make choices, it is more reflective
and emulative of the real-world market conditions developers face each day. The
results may surprise you.

The Most Basic Need: The Value of the API Itself


In a world of thousands of free APIs, it may come as a shock that the most
important variable influencing a developer’s choice was the functionality
of the API itself. This factor alone had the most profound influence on a

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the shift

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developer’s selection. We discovered in the focus groups that developers are


often first and foremost creators. And, the results of the quantitative study
proved that the art of creation was more important than any other factor.
Developers love cool. And they enjoy the art of the possible. Despite the
thousands of APIs available today, there is an opportunity for more robust
functionality that ups the cool ante. Specifically, device- and access-agnostic
APIs popped to the top of a developer’s expressed interest and latent desires.
In fact, when specifically asked, nearly 50% of developers who are involved
in negotiating API costs or determining the price point of a retail application
would be very likely to use the more popular network-based APIs from a list
of 17 tested. In fact, more than one in three still expressed a strong likelihood
of usage among the least popular network-based APIs of the bunch. To
attract so many developers among the least popular APIs tested suggests a
void in the marketplace for even more powerful functionality.

Development Support: One Throat to Choke


Reinforcing the importance of community mentioned earlier, providers must
next offer support options to attract developers. While developers are interested
in one throat to choke, service providers must change their perception of support
to this audience. Alcatel-Lucent tested the impact of various levels of support
from basic (such as email and moderated forums) to advanced (such as 24x7
support for developers and their customers) on a developer’s willingness to pay.
Interestingly, the more robust 24x7 support options did not garner sufficient
incremental developer participation in terms of willingness to pay to offset their
costs. In comparison, developers were almost as likely to select a bundle with far
less costly support alternatives, such as email and moderated forums. The bottom
line is: A developer wants the buck to stop when the community cannot solve
his problem, but that accountability need not reside in a costly 24x7 support
mechanism nor should it replace the community itself.

Bundling: More is More


Interestingly, the next most important factor governing developer’s choice
is closely related to the first. While the most important factor is the value of

through the looking glass of the commercial developer | 87


the shift

the API functionality, the third most important determinant attribute is the
way in which these APIs are bundled together. Bundling is no stranger to
the service provider. Calling feature bundles have been around for decades,
and service providers have evolved in recent years to triple-play or quad-play
bundles that incorporate voice, broadband, video, and mobile plans. The trick
to the bundle has always been around price discounts. The more you bundle
as a consumer, the more of a discount you receive from the service provider. In
a market where consumers must be compensated for putting all of their eggs
in one service provider’s basket, this notion of bundling makes sense. Service
providers are often rewarded with lower churn—that is multi-play consumers
tend to have lower attrition than their single-play counterparts. Consumers win
by earning a discount for their loyalty and volume purchases. It has been a fairly
straightforward model that has grown in popularity in recent years.

However, just as service providers need to change their notion of what support
means to a developer, they also must change their perception of bundling. In
the developer’s situation, bundling is a case where more means more. That is,
developers are likely to pay up to twice as much for APIs that are bundled together
than when offered discretely. How could this be? Are developers not in the same
market that you and I live in every day—one where bundling equals discounting,
whether considering value meals at McDonald’s or the latest service provider
packages? This would assume the developer’s primary currency is money. As
mentioned earlier, it is not dollars and cents that developers universally shell
out, but time. Bundles afford the developer more time by packaging together
complementary APIs, such as those from presence and location, through a
common communication, community, and commerce framework. The result is
a more powerful creation developed more quickly.

Marketing Support: Give Me More


The next rung on the hierarchy ladder is even greater support options, with
two deserving special attention. The first involves a basic necessity in retailing
one’s product—billing a customer—an asset a service provider clearly can offer.
Service providers have a trusted billing relationship with their end users. And,
with cybercrime on the rise, the virtual world can be a scary place. Developers

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want to tap into this billing asset that a service provider can offer, and its
attractiveness only increases as emerging micropayments via mobile devices
become more popular.

The second point is more interesting. In a world of hundreds of thousands


of applications on one device alone, developers are swimming in a complex
competitive environment. And, as evidenced by our research, developers
are hungry for information and tools that help them optimally price their
applications. Specifically, third-party network-based intelligence that identifies
the ideal price point for an application based upon aggregated user preferences
for those most likely to purchase it scored particularly well among developers as
an important variable influencing willingness to pay.

Further, as we will discover later in the consumer chapters, consumers


overwhelmingly trust their service provider over their application developer
when considering whether to share such information. This unique intersection
of aggregated customer profiling and a secure billing environment places the
service provider in a competitive position for attracting developers in need
of advanced support. It is also among one of the primary needs that must be
fulfilled to satiate a developer’s appetite.

Price: Not the Be-All and End-All


It may surprise you to see that price finally comes up as a critical factor in
influencing a developer’s participation and willingness to pay. This speaks to the
point that money is not the primary mode of currency, as we have explained
throughout this chapter. What is perhaps more surprising is the type of business
model that prevails for maximizing revenue potential among service providers.

We tested two different business models in the bundling exercise: a revenue-


sharing model (one where the developer shares a percentage of revenue collected
with the provider, similar to the one popularized by Apple) and a per-dip
model (one where the developer pays the provider each time an API call is
made, similar to options offered by some web providers). Once the developer
selected his preferred bundle in each set, we asked him to estimate two variables:

through the looking glass of the commercial developer | 89


the shift

1) the estimated retail price for an application relying upon the APIs in the bundle
and 2) how many times per day across an estimated number of users the API would
be triggered, or called. In so doing, we were able to calculate the estimated revenue
derived for a provider under either a revenue-sharing or per-dip model. The results
were provocative. Not only did developers not have an aversion to a per-dip model
(meaning that the number of developers selecting a per-dip bundle was comparable
to that of the revenue-sharing alternatives), service providers actually stand to earn
more revenue through a per-dip model based on the developer’s own estimates of
retail price opportunity versus usage of the APIs.

We can hear the collective gasp of those reading this, so let’s explain further.
Our study revealed that there are very few commercial developers who also have
a solid financial orientation. We are not suggesting that developers cannot be
businesspeople. Rather, developers are creators first, businesspeople second.
They are highly specialized in their technologies, working independently or in
small groups with other developers and without specialized business resources.
Tools that support their profitability and allow them to focus on development
are attractive and needed. Look no further than the Web for evidence of very
popular and creative applications without a sound business model to accompany
their “success.”

In 2009, Credit Suisse put YouTube on a path to lose $470 million, which made
it several times less profitable than many traditional newspapers suffering from
lost audience.49 YouTube clearly had the audience; it just didn’t have a profitable
way of monetizing the traffic. While the site has introduced several advertising
alternatives to generate revenues, it was wildly unprofitable and, at the time,
unsustainable when its founders collected $1.65 billion from Google.

Many developers have very creative ideas. What they often lack is a means of
making them profitable. As such, our study found that, based on developers’
estimates of usage and retail pricing potential, service providers stand to make
more money, without disenfranchising developer participation, with a per-dip
versus revenue-sharing model. This preference exists particularly as the estimated
retail price for the application increases. That is, the more money the developer
assumes he can earn for an application that uses the API functionality, the more

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likely he is to prefer a per-dip business model. Revenue-sharing does well among


those developers who “low-ball” the estimated retail price of an application
using the functionality. Therefore, as the market moves toward higher-priced
applications, per-dip not only affords the service provider greater revenue
potential but also tends to attract more developers than a revenue-sharing option.

You could interpret this data to suggest many developers struggle with the
business side of their equation. After all, the data suggests that a service
provider could earn up to twice as much revenue, without deterring developer
participation, with a per-dip versus revenue-sharing model. How could developer
participation stay constant in spite of what amounts to a twofold price increase?
Is the market really that inelastic? We would argue not. What we are seeing is
evidence for the high marketability of business-oriented tools and information
that support a developer in gaining fortune, not just fame. And, as we discussed
earlier, the need for these advanced business intelligence tools actually surpasses
the importance of pricing for the APIs itself, further reinforcing the point.

The bottom line in this analysis is: Providers offering a combination of business
models, including revenue-sharing and per-dip varieties, will appeal to the needs
of multiple developer groups. And, bundling web-based and network-based
APIs offers an attractive business model in itself. Finally, at the risk of sounding
like a broken record, developers have a passion for creation—not necessarily
economics. A service provider offering network-based intelligence that allows a
developer to understand his market helps maximize revenue potential for both
players in the ecosystem and creates more value for end users.

The Final Factor: Reach


As we mentioned earlier, ask a developer outright for his most important factors
for participation and reach will certainly pop to the top of the expressed list.
But, force the developer to evaluate reach among the multiple other trade-offs
made in a more complex decision, and it is the variable with the least influence
in persuading participation or willingness to pay. What developers really want
is discoverability. Reach is one means to this end. But, if reach comes with a
storefront where a developer’s application is one of several hundred thousand,

through the looking glass of the commercial developer | 91


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the creation may be lost in the clutter. Service providers seeking to gain
exclusivity for an application have a bartering chip on the table: don’t focus on
reach but discoverability.

In fact, based on the quantitative study by Alcatel-Lucent, nearly 50% of


commercial developers who are actively involved in negotiation or pricing
decisions indicated they would be much more likely to offer at least 6 months of
exclusivity for their application in exchange for guaranteed search discoverability
on the provider’s storefront. Further, more than one in three actually prefer
to develop for a more regionalized, localized provider than a large, national
alternative. Perhaps these developers have a niche that can be better fulfilled by
a local operator. Perhaps they associate a smaller operator with a more nimble,
developer-friendly orientation. Whatever the reason, the preference for this
significant minority is clear.

Don’t assume that a provider with fewer eyeballs can’t compete against a perceived
heavyweight. And, don’t conflate reach with discoverability. The two are not one
and the same. Service providers offering options to enhance a developer’s chance
of having a creation discovered will find a viable value proposition. It’s not about
the total number of eyeballs on the storefront per se, but how many of those
users are in a developer’s sweet spot and how likely they are to be exposed to the
application. Providers that shift the debate to these more meaningful concerns
will be speaking to a developer’s latent motivations, not simply expressed interests.

Putting It All Together


Quantitative evidence from over 1,300 commercial developer respondents
suggests the following:

> Service providers have a right to play in this space. Not only do
developers value the APIs that could be offered by a network provider, the
functionality of these APIs is the most important factor in influencing a
developer’s participation and willingness to pay.
> Support is critical, but not all support is created equal. Developers value
their community and the collective wisdom it produces. However, they

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also want accountability when these forums fall short of fixing the problem.
Offering low-cost support options, such as email and moderated forums,
attracts almost as many developers as much more costly alternatives, such
as 24x7 live help desks. Further, sweetening the pot with advanced support
options, such as billing on behalf of the developer and offering network-
based intelligence tools to help identify the optimal price point for an
application, is a void that can be uniquely fulfilled by the service provider.
> Time is their currency. Don’t assume price is the be-all and end-all. Before
service providers can convince a developer to open his wallet, they must
first convince him to give his time. As such, time-savers, such as unique
bundling approaches, generate significant revenue potential for the service
provider and address a developer’s most precious and scarce resource.
> Creation is their passion; business is a necessity. Don’t assume revenue-
sharing is the only viable business model alternative. Providers offering a
combination of business models will appeal to multiple segments in this
nuanced market.
> Don’t conflate reach with discoverability. Smaller providers that satisfy a
niche and/or offer advanced discoverability options can easily attract
more than one in three developers to their proposition. Further, the
value of the API functionality itself can neutralize any perceived reach
advantage offered by a provider.

The evidence supports a viable commercial developer market for intelligent


network-based capabilities. These developers are attracted to robust APIs that
simplify the development cycle. Would the same hold true for those building
within the enterprise? Turn the page to discover the interests and motivators for
the IT developer.

through the looking glass of the commercial developer | 93


the shift

94 | chapter 5
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chapter 6

through the
looking
glass
of the enterprise
IT developer

through the looking glass of the enterprise IT developer | 95


the shift

Key Chapter Highlights


Service providers attempting to address the
enterprise IT developer must first earn his trust.
This is an intangible toll paid by this audience and is
incremental to the time currency covered in the last
chapter.

Enterprise developers are accustomed to leveraging


the network for performance beyond simple
connectivity. As such, this audience demonstrates
a higher willingness to pay than their commercial
developer counterparts.

Enterprise developers also expect more from their


service provider. While commercial developers are
more tolerant of leveraging their community for
support, the enterprise developer expects the buck
to stop quickly. As such, there is an expectation and
willingness to pay for more costly support options.

For this audience, bundling is a case where more


equals way more. These developers are willing to
pay up to three times more for a bundle of APIs
when compared with the revenue potential of each
API offered discretely.

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> A 2009 McAfee study among IT decision makers across


seven sectors and fourteen countries revealed a sobering landscape. Over half of
these executives represented organizations victimized by large-scale denial-of-
service attacks. On average, respondents estimated that 24 hours of downtime
resulting from said assaults cost their organizations over $6 million. More
startling, 40% predicted such an incident would disrupt their sector within
the next year. As such, it comes as no surprise that over 90% of executives
indicated security was either “vital” or “very important”.50 What is surprising is
that security reigned supreme as the top factor when making IT investment and
policy decisions—surpassing cost-based drivers despite the recession.

In similar news, Amplitude Research’s seventh annual “What Keeps Network


Administrators Up at Night” study found a dramatic increase in those worried
about security breaches. Among the 353 network administrators, nearly 40%
were kept up at night due to this concern compared with only 27% the prior
year. Even more revealing, the study found a statistically significant relationship
between how concerned network administrators are about employee use of social
media and how worried they are about a security breach to their network.51 The
concern is merited. Consumer Reports recently found that 10% of people using
social networking sites have been the victims of a security breach. More than

through the looking glass of the enterprise IT developer | 97


the shift

half of these social networkers post sensitive private information online, leaving
themselves vulnerable to cybercriminals trolling for their next victim.52

While several similarities exist between the commercial and enterprise IT


developer, the above examples highlight the clear point of distinction: For
the enterprise developer, the stakes are much higher. These individuals
have a responsibility for protecting company assets and information as a
fundamental requirement before pursuing development interests that may
benefit their employer. While time may be the universal currency uniting
all developers as discussed in our last chapter, there is an incremental toll
that must be collected from the IT developer—his trust. He must trust that
the vendor of choice will respond quickly and effectively to any problems,
that it will offer a lower total cost of ownership (TCO) when compared
with IT decision maker do-it-yourself alternatives, and, most of all, that
any information transmitted or stored outside the protected confines of
the enterprise wall will be securely maintained. This factor places these
developers in a different league worthy of examination.

No Strangers to the Cloud


The notion of relying upon networks for intelligence and performance is as
old as computing itself. IT professionals face two ends of the extreme: smart
networks powering dumb terminals or smart devices that rely upon dumb
networks merely for connectivity. Of course, this is a gross simplification of the
options available, and the reality lies somewhere in the middle of the continuum
for most enterprises. The point is that enterprises have relied on some factor
of performance or intelligence from their networks that moves beyond basic
connectivity for some time. When Alcatel-Lucent spoke with several IT decision
makers through focus groups in 2009 about offering them greater access to more
network features, the notion was not exactly a new idea.

In fact, look no further than cloud computing as the recent headline grabbing
attention from this audience. A simple Google search on the topic renders
more than 40 million matches. According to Wikipedia, cloud computing
is “Internet-based computing, whereby shared resources, software and

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information are provided to computers and other devices on-demand….” The


underlying concept dates all the way back to 1961. Yet, it is now more relevant
than ever. And the parallels to the topic of this book cannot be ignored. Like
cloud computing, application enablement leverages resources within the
network to enhance device performance. Like cloud computing, application
enablement allows users to access information from any device. And, like
cloud computing, application enablement requires enterprises to trust the
network in protecting their content.

Given the similarities to the two topics, we wanted to delve further into cloud
computing as a proxy for how enterprises may react to application enablement.
In a survey among 550 large enterprise IT developers in the United States, nearly
half of whom are adopters of cloud computing, Alcatel-Lucent discovered that
conventional wisdom is not always reality. For example, while one may assume
that the prevalent reason for adopting cloud computing is one of economics
(the smarter the cloud, the less must be spent on intelligent devices), our data
reveals this is the least persuasive argument for adoption. Instead, respondents
were more likely to cite functionality, mobility, and reliability as the primary
motivators for their foray into the cloud.

Not surprisingly, we also found data to support the overwhelming importance


these enterprises place on protecting their company’s data and assets. Specifically,
security was the leading concern among those who have not yet adopted cloud
computing. While security is the primary objection, if it were sufficiently
addressed, a provider could entice over half of these non-adopters to increase
their organization’s likelihood of using cloud computing.

Among our focus group participants, the very topic of security raised the
temperature of the room. On one hand, respondents were eager to offload a
headache that literally keeps them up at night. On the other, the mere notion of
handing over responsibility for such a sensitive issue was downright heresy. As
many of our respondents put it, the buck stops with them in the event of a breach.
Their proverbial tails are on the line to protect the assets of their companies, not
some faceless provider’s. (They used much more colorful language to express this
point but, at the risk of offending some, we will let you use your imagination.)

through the looking glass of the enterprise IT developer | 99


the shift

Among our survey participants, the significance of security was further validated
when respondents were asked to consider network-based APIs. When asked for
the most important characteristic a provider offering such capabilities could deliver,
50% of respondents cited security in transmitting or storing their data. As in the
McAfee study, security was the dominant motivator, dwarfing the percentage of
respondents who pointed to price as the key concern (less than 20%).

Most recently, the latest crop of cyberterrorists set its sights on Amazon, PayPal,
Visa, and Mastercard, all of which denounced their support for the now infamous
website WikiLeaks. The assaulters used denial of service attacks to attempt to
crash the sites of their victims, fanning the flames of security worries for enterprises
far and wide and bringing cyberterrorism to the forefront of mainstream news.
Make no mistake—as seen in the headlines and corroborated by our research
and other sources, the security concern is legitimate and pervasive. However,
opportunistic providers who address this issue stand to inherit significant market
share by cashing in on the trust paid by these discerning enterprises.

No Pushovers on Support
If a provider must first address the security concern to gain access to this
discriminating audience, it must raise the bar on support to keep them. While
these enterprise developers share a commonality with their commercial brethren
in using forums for support, they are far less tolerant when the crowd fails them.
Since more is at stake—including the performance of their employer—a system
glitch, or worse, meltdown, is unacceptable. Unlike the commercial developers,
these respondents were much more likely to expect and willing to pay for high-
maintenance support options, including 24x7 live help desks.

Support can be a differentiating magnet for new entrants in this field,


particularly service providers. We asked respondents to indicate which third-
party provider they would be most likely to select for APIs. Not surprisingly,
Microsoft and Google commanded the mindshare preference among these
developers—outpacing popular service providers like AT&T and Verizon by
an order of magnitude. However, respondents who were more likely to select
a network service provider as their preferred partner were also more likely to

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attribute their preference to an expected level of customer care not expressed by


those selecting Microsoft or Google. Support is an expectation but it can also be
a competitive advantage for a new entrant with a perceived strength in this area.

No Compromisers on Taste
Our commercial developer study revealed an audience eager to use and pay for
network-based APIs. If commercial developers are the enthusiasts, enterprise
developers are the extremists. That is, respondents were much more likely to
either love or loathe network-based APIs depending on their functionality—
and their willingness to pay fluctuated commensurately.

Among the more popular (and higher valued) APIs were:

> A profiling API that allows tracking of application and service


consumption of enterprise users to allow for better forecasting of IT
departmental needs
> A storage API that centralizes information and content over a highly
secure and reliable network accessible from any device
> A presence API that provides for real-time messaging capabilities across
any device in use by the user (this API was also a top performer among
commercial developers)

For these APIs and others, enterprise developers expressed a much stronger
willingness to pay than their commercial counterparts.

However, on the opposite extreme, certain APIs were so unappealing, their mere
inclusion in an offering had a negative impact on respondents’ willingness to pay.
Among them were:

> A profiling API that renders content to an employee or customer based


on their preferences across any device (for technophiles in the audience,
think of these as network-based cookies)
> A quality of service API that temporarily allocates more bandwidth to an
employee, group or application for a period of 60 minutes

through the looking glass of the enterprise IT developer | 101


the shift

> A presence API that intelligently finds an end user based on the device
that person is using at the time

Interestingly, the APIs for which respondents had a higher willingness to pay tend
to center around efficiency gains at the management level more targeted toward
groups of employees. An API that tracks network and application consumption
across departments facilitates better management of the IT budget. One that
stores content in a secure and highly reliable cloud allows for better management
of information across multiple users. An API that provides for universal messaging
across any device enables better management of communication to large teams.
On the other hand, those with a lower (actually negative) willingness to pay were
more likely to revolve around individuals. Persistent network-based preferences that
follow a user across any device were not in favor. Intelligent call forwarding APIs to
find a particular party also did not perform well.

Critics in the audience may immediately point to the API that allows users—or
groups of users—to temporarily boost bandwidth as the conspicuous exception
to this rule. Why would this API rate so negatively if, in general, APIs benefiting
groups tended to perform well? Most would assume this would be a particularly
hot item in an enterprise, where productivity can be measured in dollars and cents.
However, enterprise developers clearly panned this API as low-value. Based on
our focus group research aimed at this same audience, we believe the point lies in
expectation. These network-savvy developers expect the network will perform at the
service level agreements (SLAs) dictated in their contracts with service providers.
We found a strong negative reaction to any API that may suggest the network SLA
was not delivered on a 24x7 basis and, as such, would require any “boosting” in
performance. This argument assumes these developers have appropriately forecasted
their bandwidth needs in the first place—perhaps a reason why the profiling API
that monitors IT consumption patterns across the organization performed as well as
it did. These developers want smarter tools that allow for better forecasting, which,
in turn, precludes a need (and appetite) for APIs that address the unexpected.

Since security has been such a strong theme in this chapter, we would be remiss
in omitting how it fared in the mix. When asked which APIs these developers
would be most likely to use, one focused on creating and maintaining a secure,

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authenticated connection across any device was at the top of over twenty APIs
tested—with more than one in three enterprise developers indicating they would
be very likely to use this API if it were made available. The security influence
remains powerful even when represented as an API competing against several
robust functionality alternatives.

The stakes are clearly much higher for this audience and, as such, items like
security, support, and performance are non-negotiable. And, as the data
reveals, this reality leads to more polarizing opinions on API appeal. Enterprise
developers are loath to compromise. However, for APIs they value, they exhibit
a much higher willingness to pay when compared with their commercial
developer counterparts. In fact, more than six in ten would reallocate their IT
budget to obtain the APIs tested in the study if they were made available. But,
service providers should take caution. APIs that do not deliver perceived value
are met with a commensurate, polarizing disdain that places this audience in a
league of its own.

Time is Not on Their Side


While the differences for this segment have been discussed, we cannot ignore the
universal bond that unites the enterprise developer to his commercial ilk—the
currency of time. Several findings indicate that this tenet is stronger than ever
for this audience:

> When asked for the top benefits third-party APIs currently provide their
organization, over 50% of respondents cited a reduced strain on internal
resources (the top benefit reported).
> When asked for the top challenges associated with third-party APIs,
more than one-third of respondents pointed to time-consuming process
requirements (the top challenge indicated).
> And, perhaps most convincingly, enterprise developers are willing to pay
up to three times more for APIs configured in a bundle versus those sold
separately. As in the case for the commercial developer, for the enterprise
developer bundling is a case where more equals more—or in the latter’s
case, way more.

through the looking glass of the enterprise IT developer | 103


the shift

Hence, while trust is an incremental toll paid by enterprise developers, it does


not negate time as a currency. Options that allow these developers to design and
build faster with fewer human resources are attractive. And, since network-based
APIs allow for development across multiple software and device platforms, these
alternatives offer tangible value to a time-starved enterprise market.

Putting It All Together


The enterprise developer shares some perspectives with commercial counterparts.
Like commercial developers, those in the enterprise expect communications
interfaces to enhance, not impede, development efforts (recall that SOA,
the predecessor to common web-based architectures today, originated in
the enterprise). Like commercial developers, those in the enterprise consult
with one another in forums for sharing and support. And, most importantly,
enterprise and commercial developers are both time-deprived and value this
critical resource above all.

However, the differences between these groups cannot be denied and have
implications for providers attempting to tap into the enterprise:
> Security is both the challenge and opportunity when addressing these
developers. As many in our focus groups put it, their reputations are
on the line in the event of a security breach. And, as the headlines
corroborate, one security mishap translates to millions of dollars in cost
or lost equity to a corporation. In short, security is not an option. It is
the table stake by which a provider earns the right to play in this space.
> Enterprise developers are far more discriminating. They love some APIs
and loathe others. While this audience is hit or miss, the hits are big.
Therefore, they may be more selective than their commercial brethren,
but they also reward providers with a much higher willingness to pay.
> Enterprise developers demand support. Unlike commercial developers who
are more content to rely on the power of the crowd to address questions,
these individuals expect the buck to stop—and stop quickly. If security is
the ticket for admission to this market, advanced support options, such as
24x7 live help desks, keep a provider’s seat at the table with this audience.

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> Time is a scarcity. This fact can be viewed opportunistically (such as


through bundling of APIs that increases willingness to pay up to threefold).
It can also be an impediment to a provider that just doesn’t get it.
Remember, the key challenge in using third-party APIs for these enterprise
developers today is time-consuming process requirements. If a provider
burdens the developer with complex processes, any value perceived in
bundling will be quickly eroded.

As the past two chapters have illustrated, the developer market offers a largely
untapped reservoir of incremental revenues for providers of network-based
APIs. In turn, these developers benefit with improved functionality and faster
speed-to-market. The question now becomes one of determining whether
commensurate value exists for other stakeholders in the ecosystem. Let’s explore
how advertisers stand to gain in this evolving value chain.

through the looking glass of the enterprise IT developer | 105


the shift

106 | chapter 6
the shift

adver-
chapter 7

tising
the eyes have it

advertising: the eyes have it | 107


the shift

Key Chapter Highlights


With advertising, impressions are king. In the past,
success meant getting a brand in front of as many
eyes as possible. Now, that means getting the brand
in front of the right eyes and facilitating interactivity,
e-commerce, mobile commerce, and more to turn
impressions into awareness and then into sales as
directly and measurably as possible. Identifying
the “right” eyes means gathering more data on
users and balancing the need for data with the
consumer’s right to privacy.

“Seventy-one percent of agency respondents said


they expect online ad spending to experience
significant share growth in the next 2 to 3 years.”
When asked why, respondents cited behavioral
targeting, speed of campaign execution, improved
measurement and accountability, and a belief that
“traditional media are no longer the most effective
way to build brand equity.”

According to the National Advertising Initiative, ad


inventory from behavioral ads is worth twice that
of non-targeted inventory, with nearly 2.5 times the
click-throughs.

More people in the world have access to mobile


phones than to running water. Users check their
mobile devices 100 times a day on average (200 if
they’re a teenager). As the new mass medium, mobile
technology is the next frontier for advertising.

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> In just 13 years, online advertising reached $20 billion


in revenue in the United States. It took newspapers 127 years to accomplish the
same thing, and broadcast TV and cable TV, 37 and 25 years respectively. The
explosion of the Internet goes hand in hand with one of the key ways companies
seek to monetize it—advertising.

We say “seek” to monetize because the road to online advertising pots of gold is
littered with failures. In 2000, Freei, a free ISP hoping to sustain itself on display
ads, went from IPO to bankruptcy in 6 months. Freei was ultimately acquired by
NetZero, a company that swallowed up failed free Internet access copycats and,
by 2001, began charging for its services.

More recently, video sites Hulu and YouTube launched with ad-based models and
have yet to prove their profitability. Hulu—a tight partnership of broadcaster
networks—has tinkered with its ad model and added paid content, and YouTube
got an influx of cash from its Google acquisition on the promise that there is
money to be made somewhere. Nevertheless, advertising is a key piece of
revenue for companies within the 2.0 ecosystem—from newer companies like
Google to TV networks. New media for advertising are also trying to establish
themselves as part of the marketing and advertising mix. Consumers have gone

advertising: the eyes have it | 109


the shift

more mobile, shifted time and attention to social media, and spread their TV
watching across more varied broadcast and cable network options, plus the PC.
Wherever consumer eyes go, advertising will follow. Plus, the new technologies
provide advertisers and agencies capabilities they don’t have with traditional
print and electronic media.

According to a Marketing & Media Ecosystem 2010 survey conducted on behalf of


leading industry groups, “71 percent of agency respondents said they expect online
ad spending to experience significant share growth in the next two to three years.”53

When asked why, respondents cited behavioral targeting, speed of campaign


execution, improved measurement and accountability, and a belief that
“traditional media are no longer the most effective way to build brand equity.”

The movement toward online marketing has meant advertisers and agencies
forming new partnerships “to access deeper data and analytic capabilities and
expand into high-growth platforms such as mobile and social networking.”

The Changing Advertising Mix


The same survey of marketers found them planning significant shifts in spending
away from traditional one-way consumer engagement.

In developing new technologies and business models that include advertising


as a revenue source, interactivity and personalization are integral for customer
engagement and, therefore, attracting advertisers.

But then comes the question of what this looks like and how it will work.
The marketing survey points to spending increasing for “digital” and “mobile”
advertising, but there are numerous applications that fall into those broad
categories. What kind of advertising can the 2.0 world offer? How do advertisers
reach their targets?

To understand the new media advertising world, let’s start by looking at how
advertising works in traditional media. Print media (newspapers and magazines)

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and traditional electronic media (television networks, local TV stations, radio)


sell advertising inventory—or ad space—to advertisers either directly or through
advertising agencies. Agencies act as brokers, leveraging volume ad buys to
decrease pricing and streamline ad placement for advertisers. Agencies also
coordinate the advertising campaigns—developing concepts, producing ads,
and managing the advertiser’s budget. The industry has developed systems for
consolidating ad inventory, which now allow agencies to book the campaigns,
track success metrics, and provide billing information.

Marketers get it:


They need to catch up to where the consumer is
Source: Marketing & Media Ecosystem 2010 survey and Booz & Company analysis

In the end, a fill-in-the-blank consumer packaged goods company or auto


manufacturer has purchased ad inventory in The New York Times, GQ Magazine,
the Monday night lineup of CBS, and local morning drive-time talk radio stations.

Integration of new and old ad media campaigns—buying, tracking, and


billing—is still a fragmented business. Traditional and online advertising each

advertising: the eyes have it | 111


the shift

have their own tools, processes, and business models. Advertising for mobile
devices is still establishing its rules of engagement. For now, systems used for
traditional media have expanded to include new media advertising, and agencies
and software companies specializing in new media and/or mobile advertising
spring up every day, marketing themselves as helping advertisers make sense of
new media marketing platforms.

Social Media & Marketing


One new area of focus for online advertisers is social networking sites. Facebook
alone now consumes 7% of time spent online around the world with social
networking as a whole totaling 12% of an Internet user’s time.54 Use of social
media in marketing, however, goes much beyond display advertising.

In our chapter on social networking, we will discuss the growing consumer trend
of using social media as a filter and navigator for the vast amount of information
online—including to research products and services before buying. As social
media grow as a resource for pre-purchase decision making, brands will expand
their presence. Social networking is great for uniting the personal intelligence of
your family, friends, and colleagues with the reach of technology to gather personal
testimonials and horror stories. Of course, trusting personal recommendations
predates the upswing in web-based technology, but as people become more
accustomed to connecting to their personal network online, this is where social
media become places for brands to intersect with consumers as they exchange these
personal recommendations in a way never available to them before.

Already some brands are using social media in an attempt to engage more deeply
and personally with their customers and establish an online relationship with
them. They are launching Facebook pages and Twitter feeds to keep interested
consumers up to date on product news, offerings, and discounts.

Marketers are moving from a broadcast-based marketing


relationship with consumers to a relationship that more
explicitly considers how traditional paid media drives
“earned media”—where consumers directly engage with

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the marketing messages and pass them along to their


friends. The Web-based aspect of this engagement has
also made it much more measurable, which has inspired
new ideas and research on the relationship between
“paid” and “earned” media and their respective impact
on brand perceptions.55

On Facebook, paid media includes the paid display ads that appear on a user’s
home page along with the option to become a fan. The next type of advertising is
a homepage ad with social context, which includes the name of a network friend
who has already become a fan of the brand. This is a mix of paid and earned
media. Thus far, display advertising alone hasn’t been a huge money maker for
social networking sites. Low click-through rates caused social media revenue to
grow just 4% in 2009, despite exponential user growth, to $1.2 billion in the
United States, the largest market for social media ads.56

But, earned media opens up new market potential. In 2010, Alcatel-Lucent


canvassed over 1,200 advertisers in the United States to solicit their interest in a
variety of next-generation advertising services. At the top of the list? A capability
that works with social media sites to deliver advertisements to a user based on
interests and behaviors of their friends and family. For instance, if one hundred of
Bob’s Facebook friends like a certain new video release, coupons and downloading
options would be sent automatically to Bob. Advertisers like the option of being
able to capitalize on the billions of conversations and expressed preferences on
social networking sites every day. In fact, more than one in three advertisers
indicated they would be very likely to use such functionality if it were available.

Finally, there are organic brand impressions. Organic impressions occur when
a friend “fans” a brand page or when a friend incorporates a brand mention or
a link to brand content in their status or wall. An organic impression shows up
in a user’s news feed, and the brand has no direct control over its appearance.
However, because these mentions now occur in the public space, companies
do have more awareness than ever of how consumers are responding to their
brand—either positively or negatively.

advertising: the eyes have it | 113


the shift

Facebook engaged Nielsen to measure the effectiveness of paid and earned media
and found significant increases in ad recall, brand awareness, and purchase intent
when advertising was combined with organic impressions. Ad recall and brand
awareness tripled—from 10% to 30% and from 4% to 13%, respectively—and
purchase intent quadrupled from 2% to 8%.57

The reach of social media is also combined with the ability to use basic profile
information—gender and age—to target ads. For Sony Entertainment, demographic
targeting helped them create a successful customer engagement campaign to
promote three movies in 2009.

The studio ran a series of ads on Facebook promoting three of its films
they had just featured in a traditional television campaign. District 9
was aimed at young men, Julie & Julia at middle-aged women and
The Ugly Truth at younger women. Awareness of the films was
measured after the TV ads had run and then again after the web ads
had run. Each time the online ads significantly boosted awareness.58

As suggested by the Nielsen study, the campaign was effective because it balanced
the reach of a paid social media ad with reach of another mass medium to drive
increased consumer participation and engagement.

What creates value for marketers is the ability to tie social media use with the use
of other media and with a wider set of consumer activities, particularly those that
create more organic impressions. The use of social media lends itself naturally to
behavioral targeting, using a consumer’s web searches and websites visited, to
deliver content, ads, and articles personalized for the user.

According to the National Advertising Initiative, ad inventory from behavioral ads is


worth twice that of non-targeted inventory, with nearly 2.5 times the click-throughs.59

Mobile Advertising
The next area of focus for the next generation of advertisers is mobile. If
advertising goes where the consumer’s eyes go, it had better go mobile. And

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signs are pointing that direction. According to Informa Telecoms & Media, the
mobile advertising market was worth $2.3 billion in 2009 and will be worth more
than ten times that—$24.1 billion—in 2015.60 This exponential increase seems
reasonable given the current trajectory of mobile growth, with smartphone sales
increasing three times faster than PCs, according to Gartner.61 Morgan Stanley
is equally bullish, predicting that smartphone shipments will exceed those of
PCs by 2012.62

Industry guru Tomi Ahonen has declared that as the seventh mass medium,
mobile encompasses all the capabilities of print, recordings, cinema, radio, TV,
and the Internet, plus eight unique qualities that make mobile superior to them all.

1 Mobile is personal.
2 Mobile is permanently carried.
3 Mobile is always on.
4 Mobile has a built-in payment method.
5 Only mobile is always present at the creative impulse.
6 Mobile has the best audience measurement.
7 Only mobile captures the social context of
consumption.
8 Only mobile enables augmented reality (as a
consumer-oriented mass media device).63

Mobile provides a ubiquity that has captured the attention of US consumers.


Most people don’t share their phone—even with a spouse. Users check their
mobile devices 100 times a day on average (200 if they’re teenagers) and sleep
with their phones turned on and within arm’s reach. Worldwide, the ubiquity of
mobile is much the same. More people on the planet have mobile devices—75%
of the world’s population by the end of 2010—than access to running water.64
In addition to delivering the eyes, the personal nature of the mobile device plus
the growing set of activities executed on the phone allow network providers
and—by extension—marketers to gather more user information in aggregate to
segment and target the mobile audience.

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the shift

AMF Ventures measured the relative performance of three


media for audience identity. On TV we can only catch 1%
of audience data. On the internet we can capture far more,
10% of audience data. But on mobile, we can capture 90%
of audience data. … Only on mobile can we capture the
social context of our consumption. Not what we consume
(or when, or where) but with whom.65

Companies like Xtract are pulling this data from service provider networks to
help them track behaviors that indicate churn for customers and their social
communities as well as helping them monetize the mobile network with
targeted third-party advertising. Targeting and personalization are key promises
of mobile advertising. With mobile, you know where consumers live, where they
are, and some details about what they do—their social context.

As sellers gather more information about those who are buying and deliver targeted
messages that address a consumer’s needs and interests, the messages become part
of a relationship. Advertising will need to be more than an enticement to buy. It
needs to foster an ongoing customer engagement that builds brand loyalty.

The implications of profiling a user’s behavior on the mobile device are not
without challenges. However, consider this: In an Alcatel-Lucent study of 2,000
US consumers, over 50% indicated increased comfort of sharing sensitive profile
information (such as location, presence, and online behaviors) when made
available to their mobile provider. In fact, the mobile provider earned more
“trust” votes in this poll than people respondents knew personally.

And, advertisers are enthusiastic about gaining access to such information to


better target their efforts. Among the advertisers in the Alcatel-Lucent study, the
one capability that tied the social media service mentioned earlier in popularity
involved tracking a user’s behavior across all devices connected to the network
(mobile, TV, game console, PC, and the list goes on).

Delivering ads to the consumer via a mobile device can be accomplished in


such a plethora of ways, it can be confusing for advertisers and complicated

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for agencies. Each has a different set of required players and processes. Who
are the media owners selling advertising inventory? With traditional media,
this is a much simpler question—TV networks, radio stations, newspapers,
etc. In mobile media, there is an ecosystem of “owners” who have the ability to
implement a mobile advertising solution. Mobile carriers, device manufacturers,
application developers, and mobile website owners are just a start. There are also
mobile ad networks that bring these players together.

There’s been a spate of acquisition in this space as the usual Web 2.0 suspects race to
position themselves. Google acquired AdMob, Apple acquired Quattro Wireless
to launch its iAd offer, and Microsoft has made noise about bidding for Millennial
Media. These mobile ad networks provide platforms for developing and serving
ads in mobile websites or applications, while providing a means for agencies and
brands to book and measure campaigns by cost per click or page view.

Google/AdMob
Winning approval from federal regulators in May 2010, Google immediately
announced mobile advertising plans sprouting from its $750 million acquisition
of AdMob. AdMob was one of the first companies to provide ads embedded in
mobile applications. Prior to the Google acquisition, AdMob had 9,000 mobile
websites and 3,000 applications and top advertisers like Diet Coke, MTV,
Disney, and Best Buy in its network. In the acquisition announcement, Google
also emphasized its continued focus on search, saying, “search advertising will
remain the central way that many businesses connect with consumers on mobile
devices.”66 Whether this is true given the passivity of waiting for consumers to
search and the increasing desire for interactive customer engagement on the part
of brands, Google owns search in the online ad space and would like to extend
that dominance to the mobile arena.

Millennial Media
Millennial Media is, as of this writing, one of the last independent mobile ad
networks. In March 2009, Millennial Media took over the #1 spot for impressions
from AdMob, reaching 80% of the nearly 67 million unique mobile users.67 All the
major media companies use Millennial, which has built its business without exclusive
ad agreements with the philosophy that publishers should use multiple ad networks.

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Microsoft Mobile Advertising


Microsoft offers integrated display advertising across its mobile, PC, and gaming
platforms and is developing Bing with new capabilities targeted at improving
the mobile search experience and leveraging the uniqueness of mobile using
context, location, and product scanning. With the release of Windows Phone 7,
Microsoft is highlighting the phone’s screen real estate available for advertisers
and real-time bidding available through the Microsoft Advertising Exchange
for Mobile.68 The Microsoft ad exchange will allow multiple ad networks to
bid on mobile display ad inventories at the time an ad impression is served to
a consumer on the mobile web or in applications. Microsoft partnered with
numerous companies to develop the exchange, including rumored acquisition
target Millennial Media. Microsoft has established relationships with other key
partners like Verizon Wireless, MSNBC, CNBC, and Fox Sports.

Apple iAd
Announced in April 2010, Apple iAd was viewed as just another step in Apple’s
desire to control the customer’s experience of their brand from end to end within
their walled garden. This was borne out when, in June, Apple provided details
about the offer, including verbiage in developer’s terms that prevents third-
party advertising platforms from collecting the kind of user data that enhances
ad targeting—such as location information. This move in effect shuts out
competing platforms from Google, Microsoft, and others. While this is expected
to attract anti-trust attention from US regulators, Apple’s position as the #2
smartphone handset behind RIM’s BlackBerry will help them avoid trouble.
Another issue is the end of the unlimited data plan for new AT&T iPhone
subscribers, which means users will become more sensitive to the data consumed
by their applications. A user won’t want to pay for a free app by paying to receive
an ad or, worse, an eye-catching but data-hogging multimedia commercial. On
the plus side, the breadth of the Apple developer community has the ad industry
highly interested in what new ad formats and ideas are forthcoming.69

THE MANY OPTIONS ON MOBILE


Paid search and display ads dominate the offerings for these ad networks,
mirroring the online advertising world. In 2009, nearly half (47%) of Internet

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advertising dollars went to paid search, and 35% went to display advertising.70
Today, advertisers who choose to promote their products and services via online
ad platforms may extend their dollars to include the mobile ad platforms as part
of their campaigns. Mobile users search using Wireless Application Protocol
(WAP) or mobile web browsers. Display ads appear on mobile websites or are
embedded in mobile applications.

Given the most common price for paid apps is 99 cents, in-app advertising is
the revenue stream for many hopeful app developers.71 However, like many
others who pinned their hopes on advertising dollars, very few apps get enough
downloads and enough repetitive use to generate real income. Many of those
that do come from companies with established brands on the mobile Web—like
ESPN and The Weather Channel, which offer news that draws frequent visits.
Right now, most of the 300,000+ applications from Apple represent more of an
ad inventory glut of unknown value.

Another option for mobile advertising uses content identification technologies


like barcode scanning, digital watermarks, and fingerprinting to merge mobile
with traditional media. Many of us are familiar with reading barcodes with our
camera phones to link to additional information like movie trailers or pricing
comparison sites. Visual digital watermarking works much the same way except
that the readable image is invisible to the naked eye, so it doesn’t interfere with
the aesthetics of an ad or piece of video content. There is also audio digital
watermarking, which embeds an undetectable audio cue in a piece of audio.

Spanish car magazine Autofacil has used watermarking to revitalize its print product.72
All editorial and ad content is digitally watermarked, embedding a mobile, digital
experience into the magazine. Just point your phone at an image in the magazine and
be taken to video of a car, a website, or some other kind of information.

Fingerprinting takes image recognition a step further. Rather than keying in on


an embedded image, it recognizes the inherent uniqueness of an image—like
the swirls of a fingerprint—comparing it to a database of pre-registered, mapped
images. An advertiser can take any image, including past ad creative produced
without a watermark, and use image recognition technology to link a consumer

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to additional content. These technologies have great impact on brands and


media looking to create richer, more interactive experiences with consumers—
even with regular TV and print content.

The fourth option for mobile advertising is messaging—Short Message Service


(SMS) and Multimedia Messaging Service (MMS). This is one option that is uniquely
mobile. Messaging campaigns require strict opt-in policies to avoid spamming the
consumer with unwanted messages, but allow delivery of ads, coupon codes, links
to the mobile web and, with MMS, a richer media experience with audio, video, and
barcode coupons that can be scanned at the point of purchase. In the same Alcatel-
Lucent study of US consumers, respondents expressed a surprising tolerance to such
mobile-based advertising, with take rates for a service incorporating SMS or MMS
ads comparable to those containing a PC- or television-based advertising model.
Clearly, the emergence of mobile bandwidth caps may hamper this appetite, but
advertisers, developers, and providers should be encouraged that the presence of
mobile ads did not create an aversion to a service as one may assume.

The available ad inventory for mobile advertising is the mobile customer base in
combination with the advertising options available on each device. For example, a
carrier might have one million customers, each with a device. Some of those devices are
smartphones. Most will not be. At the end of 2009, just 17% of mobile subscribers in
the United States carried a smartphone. If the advertising is geared for a smartphone—
that is applications for iPhone or Android devices—an advertiser is missing a huge
portion of the ad inventory. A basic mobile phone may offer text messaging and nothing
more. This endless diversity of devices and standards is one of the main challenges to
an industry-wide, standardized approach to mobile advertising, which would enable
effective execution of ad campaigns consistently across the customer base.

That fragmentation is exacerbated by the rise in the


consumption of applications and the emergence of in-app
ads that—while enormously promising—provide just one
more subset of platforms for advertisers to address. And
that problem is likely to only get worse until we see some
substantial consolidation among OS developers and application
distributors.73

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This is one reason why industry watchers like Tomi Ahonen promote messaging
as the key mobile advertising option. Standards for interoperability are already
established. Another reason is that copying advertising options from other
media (paid search and display ads) is an incomplete strategy that doesn’t
provide the customer engagement possible with mobile media. Messaging offers
two-way communication with the customer that can be instantaneous or on the
customer’s own terms. Currently, some brands offer messaging-based marketing
directly to customers using opt-in codes that require a customer to pay to send
and receive messages from brands. This method is difficult to scale—scalability
being a benefit offered by ad agencies who allow brands to buy placement across
aggregated inventories.

Aggregation of the mobile messaging inventory is an entry point for the service
provider in the advertising value chain. By leveraging their relationship with
their customers, providers can incent the customer base to opt in for advertising
offers, allow them to set their interests and preferences, and make that inventory
available to advertisers. And, as was evidenced through the Alcatel-Lucent
study, the ability to send a variety of messages, including SMS, MMS, IM,
and email, to any device regardless of form factor also scored particularly well
among developers, further proving the power of messaging in mobile and other
environments. In April 2010, Alcatel-Lucent launched its Optism Mobile
Advertising offering, which goes a step further by providing a hosted solution to
aggregate ad inventory across multiple providers, while giving providers control
over what campaigns go out to their subscribers. On the agency side, Optism
offers the campaign booking tools that allow agencies to buy media; execute,
track, and tweak campaigns on the fly; and measure results.

COMBINING MOBILE SEARCH AND MESSAGING


One interesting entrant in the mobile search game seeks to leverage the unique
elements of mobile through messaging and gain an advantage of online search
options exported to mobile, like Google. Launched in 2008, ChaCha offers a
messaging-based answer service and a voice-enabled search service to users who
either text their question to 242242 (“CHACHA”) or call 1-800-2CHACHA.
Users can also sign up for the service online and get specific content targeted for

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the shift

them. Once they’ve asked a question, they get a response in less than 3 minutes
from one of ChaCha’s 55,000 guides, actual humans who research and log
answers for the service.

Advertisements, including targeted ads for users who’ve opted in, are pushed
to the user during the wait time. For example, ChaCha and a national movie
theater chain pushed location-based ads for an Indianapolis-area theater
showing Twilight Saga Eclipse to females aged 13–30 for a week prior to the
movie’s opening. The impact was a 23% uplift in ticket sales for the advertised
theater over the chain’s other local theater. The ad campaign won a Mobi award
for “Best Location-Based Mobile Campaign.”74

In a presentation to the Mobile Marketing Association, CEO and co-founder


Scott Jones described the differences between desktop and mobile search.75

Desktop Mobile
Solitary Social

Fixed location On the go

3+ hours 3 minutes

Sift through results Top 3 results or less

Frequently click around Almost never click through

Often research-oriented Timely, contextual, personal topics

Mobile searchers are looking for specific answers—often to drive an immediate


purchasing decision—within a short amount of time and on devices with screen
sizes and variable download speeds that can make clicking back and forth
through results a frustrating experience. Jones, who is also one of the pioneers
behind the music information database that drives iTunes, asserts that ChaCha
is “#1 in real-time mobile answers,” citing Nielsen numbers showing it recorded
double the unique mobile transactions of Google in 2Q2010.

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ChaCha is an example of yet another way to capitalize on the immediacy and


personalization of mobile, using technologies that reach across mobile platforms
without relying on smartphone capabilities.

TV and Video Advertising


As ubiquitous as mobile is and will be in the future, not all content will be
consumed on mobile. Full-length video—shows, sports, movies—still lend
themselves to larger screens. Despite growth in online and mobile video, America
still has more TVs in each home than people. More than half, 54%, of Americans
have three or more TV sets in the home.76 Delivery of these services to the
home TV or PC relies heavily on advertising revenue to make them profitable.
However, as we saw in the Marketing & Media Ecosystem 2010 survey, agencies
expect to spend less money on one-way ad media, including more than 30% less
on TV advertising.

The TV business—even broadcast networks—are now 50% ad-supported with


approximately $68 million coming from ad revenue and $68 million coming
from TV subscriber fees from cable, satellite, and IPTV. Despite the notion that
broadcast TV is free, in reality, 90% of Americans are paying for their TV.77

Ad-based online video sites, such as Hulu, have thus far generated more press
than revenue. As reported in a March 2010 article in Advertising Age, offering
its network TV content for free to consumers has brought Hulu just enough
advertising revenue to cover the cost of delivering the service.

Hulu won’t comment on its economics, but if you consider


that it’s selling video ads and companion banners together in
the $40 CPM range, and it appears to be about 50% sold out,
when 70% is paid back to networks, Hulu is netting pennies per
viewer per hour, about what it costs to deliver video of that
quality.78

To overcome the profitability challenge, Hulu made several moves in 2010.


First, it introduced Hulu Plus, which the company’s website describes as “an

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the shift

ad-supported subscription service.”79 Hulu Plus is, in part, an attempt to attract


popular cable programming. Cable networks are hesitant to offer full-length
programs online because they heavily depend on subscription fees, and they
don’t want to cannibalize their business. For example, Comedy Central’s The
Daily Show initially authorized its content for Hulu, but then dropped it.

Second, Hulu has worked to improve its ad delivery with more targeted
advertising. Hulu profiles its users based on their viewing history and claims it
can tell with 99% certainty whether a viewer is male or female by looking at their
choice of content. Hulu plans to start personalizing ads by addressing users by
name. Targeted ads on Hulu, CEO Jason Kilar says, get a 10% response rate and
have made its ads 55% more effective than traditional channels. 80

Hulu’s primary source of revenue is still through advertising, though the exact
mix of ad and subscription revenue isn’t disclosed. CEO Kilar has said that
over 40% of revenue in the online video industry comes from advertising.81

The bottom line is: Pure ad-supported online and broadcast video content
as we know it is, according to Advertising Age, “increasingly becoming an
endangered species.” This doesn’t mean that ad-supported content goes away.
As long as consumers are still watching television, advertisers will continue to
be interested in supporting video content. However, the video entertainment
business model will be a mix of ad-supported and subscription-based, and
the nature of TV advertising must evolve with the times to become more
interactive and offer greater return.

Interactive TV Advertising
Attempts to create an interactive advertising experience on television are not
new. Thirty years ago, Warner Cable launched Qube, a two-way interactive
cable system in Columbus, Ohio. In the 1990s, other ventures including WebTV
and AOLTV came and went, failing because of bandwidth constraints. Today,
bandwidth-to-the-home has grown and network infrastructures are vastly more
equipped to handle two-way data flow.

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The advertising is distributed by the TV service provider or directly to an


Internet-enabled TV or other connected device, such as a Blu-ray Disc™ player or
gaming console. Cable companies are rolling out set-top boxes enabled with the
Enhanced TV Binary Interchange Format (EBIF), which will reach a projected
48 million cable subscribers by 2012.82

Interactive TV ads are delivered in three primary ways:

Bound applications – Ad content tied to a channel and


displayed as an overlay, full screen with the channel reduced to
a picture-in-picture, or with an on-screen prompt for the viewer
to launch the application by pushing a button on the remote

Unbound applications – A widget overlay or branded microsite


or interactive virtual channel

Portals/walled gardens – Dedicated information portal bundled


with customer care features

Entry points into the interactive ads can be presented to the viewer in
numerous ways, from a banner on a menu or pause/delete screen to interactive
tags inserted onto the screen while viewing, which prompt the viewer to click
a button to receive additional content. The ads can link to web content pulled
into a widget displayed on the screen or to rich media content like video on
demand with information about offers and discounts. As mentioned earlier,
using audio or video watermarking and fingerprinting, TV advertising can
also be merged with mobile. The ABC network tested the technology with its
now defunct show “My Generation,” embedding audio watermarks that would
trigger an iPad app to launch with additional content about characters and
storylines.83 The show failed, but ABC is looking to integrate the technology
into other shows and as an opportunity for brands.

Within the advertising applications, advertisers can also turn the television—
or mobile device—into a point of purchase, using the service provider as a
billing intermediary or having the customer link the loaded widget with an

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the shift

online account (like Amazon.com) where payment information is already


stored. In this case, the TV and/or connected device serve as a portal to the
customer’s online account. Opportunities are nearly limitless for application
developers to create new ways for a viewer to interact with the service provider,
content provider, or brand through the two-way TV interface.

For interactive TV advertising, as well as with mobile advertising, the service


provider has the benefit of already owning a billing and payment relationship
with the customer that brands could leverage to turn the consumer devices into
points of purchase at the moment of “creative impulse,” as Tomi Ahonen put
it. Interactivity drives more immediate customer engagement, closing the loop
between awareness (seeing the ad) and action (making a purchase) in the customer
buying cycle. With the emphasis on ad success measurement, generating revenue
is infinitely better than tracking TV ratings and changes in brand recall.

Service providers offering triple play services also have the opportunity to
converge not only the customers’ services across multiple screens, but also
the touch points for advertisers, adding even further value in terms of reach,
measurement, and enrichment of the customer-brand relationship. Right
now, that is something no other player in the advertising ecosystem can offer,
but it’s up to providers to recognize and seize that advantage.

Putting It All Together


In the 1990s, the big idea in communications involved “owning” the customer.
Providers were seen to be in a position of power if they held the billing
relationship with the customer or monopolized their attention with a portal
or walled garden (remember AOL as the classic example?). Today, assuming
you can “own” a fickle Millennial, disruptive Gen Xer, or non-brand loyal
Baby Boomer is about as naïve as attempting to rule the universe. Times have
changed and these segments will not be “owned.”

However, there is an apparent paradigm shift underway and nowhere is it more


visible than in advertising. If “owning” the customer is irrelevant, its popularity has
been replaced with “owning” information about him. In other words, providers that

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are able to know more about a customer (in the way of preferences, location, and
presence, to name a few) will find themselves in an interesting position to potentially
monetize such information. However, there are a few pitfalls to acknowledge
before jumping head-first into what could be the shallow end of the pool:

> No one can control the customer; providers should not even aspire to
it. The customer must remain in control at all times. He controls who
has access to his profile and when such access is permitted. Attempting
to obfuscate or complicate in this realm will only serve to disassociate
providers from their market.
> Trust becomes the new currency of the relationship. The provider
that possesses the greatest amount of trust by the customer stands to
inherit the earth. Customers must have the option to opt in with full
transparency. Control empowers customers. In turn, they will empower
trusted providers with more information. This information, in turn,
can be parlayed to an advertising community willing and able to pay
dividends. However, it all starts with trust and can easily end the same
way if a provider fails the customer at any point in the cycle.
> Aggregators that enable advertisers to create an ad one time and have it
optimized and transmitted across any device (including TV, PC, and
mobile) will play a unique role in the value chain. Advertisers are eager
to eliminate the complexity within today’s fragmented media and device
markets. Providers that can address this need will tap into another part of
this evolving value chain.

The days of “spraying and praying” one’s advertising message across a slew of
channels, hoping to garner enough reach and frequency to move the revenue
needle (but with virtually no evidence to support one actually did) are quickly
coming to an end. Reach is being replaced with targeted impressions. Awareness
advertising is giving way to performance-based metrics. Critical network
capabilities, like presence, location, and profiling of end users, have a new role
to play in this game.

However, technology cannot substitute for sound business judgment.


Companies looking to tap into these new advertising opportunities must start

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the shift

first with consumer trust. Users must remain in control of their profile at all
times—no exceptions. Providers that earn this trusted relationship will find
themselves in a unique position to monetize this information, while honoring
their customers’ interests. And, advertisers will finally be able to demonstrate
their ROI with clear performance metrics, not hypothetical estimations.

Consumers remain in control and receive targeted and relevant advertising.


Advertisers and developers get hard metrics on performance. Service providers
monetize their trusted relationships with consumers. And, the entire ecosystem
benefits with this trifecta that makes advertising effective and relevant in a 2.0 world.

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part 3

the
consumer
2.0 influence
the shift

130
the shift

VIDEO
chapter 8

the next unstable


business model

video: the next unstable business model | 131


the shift

Key Chapter Highlights


YouTube accounts for 26% of total time spent watching
online video, more time spent than on the rest of the top
twenty-five sites combined. However, most online video
viewing, 52%, occurs on the scatter of sites emerging in
the long tail.

By year end 2011, the number of cord cutters is expected


to grow to 1.6 million households. This number is still
minute considering the over 280 million households with
TV service, and the fact that the average household has
2.86 TVs and 2.5 people. The concern: cord cutters (or
cord-never-havers) skew younger. Seventy-two percent of
online-only viewers are between 18 and 34.

The traditional system for producing TV and movie


content is deeply entrenched and will be difficult to
disrupt, but consumers’ demand for more convenient
video delivery, à la carte video, and the expectation of
free content will put pressure on that system to innovate
and to restructure to squeeze complexity and cost out of
production and distribution.

To keep customers paying for video services, providers


should look to deliver high-value, customer-centric video
offerings such as multiscreen with the ability to access
and manage all media seamlessly across platforms. On the
advertising side, interactivity, targeting, and turning TVs
into a point of sale device can provide additional revenue.

Web-enabled entertainment devices also bring the


opportunity to deliver app stores to the living room, which
opens new revenue opportunities.

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> At the end of 2009, the entertainment industry magazine


Variety published an article looking back at the 2000s. Summing up the decade
that began before the introduction of the iPod, Cynthia Littleton said this:

Perhaps the single biggest change that showbiz has grappled


with this century is the loss of so much of the control it once
wielded over the production, distribution, and exhibition of
filmed entertainment. Consumers have more say in when and
how they decide to see a movie or watch a favorite TV show, or
forgo those leisure-time traditions entirely for a vidgame or an
online pursuit.

It’s maddening to many in the biz that ticket buyers and TV


watchers are more fickle, simply because there are so many
more options, or that a $15,000 horror pic with great Internet
buzz can outshine movies with budgets 1,000 times bigger.84

Maddening as it may be, the growth of alternatives for the eyes of the consumer
has dramatically shifted the landscape of entertainment. It started with music,
file sharing, and iPods, and now the consumer trend toward “when I want, how

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the shift

I want” entertainment is changing the TV and film industries. That is illustrated


most starkly by “cord cutters”—those who forgo pay TV entertainment
altogether in favor of online options, many of which are free.

ComScore reports that online video viewing grew 42% in 2008, about ten times
the growth rate of TV viewing.85 YouTube accounts for 26% of total time spent
watching online video, more time spent than on the rest of the top twenty-five
sites combined. However, most online video viewing, 52%, occurs on the scatter
of sites emerging in the long tail.

In 2009, 800,000 US households dropped their pay TV service to rely on online


and over-the-air video, according to the Convergence Consulting Group. By
year end 2011, the number of cord cutters is expected to grow to 1.6 million
households. Right now, this represents just 3% of online viewers, but that
is also the same number of subscribers forecasted to be added in 2011.86 By
comparison, according to Nielsen, there are over 280 million US TV viewers,
with the average household having 2.86 TVs and 2.5 people.87 While that doesn’t
make a significant dent in the overall numbers of households, it could indicate
slowed growth, particularly since the online-only TV viewing audience skews
younger. Seventy-two percent of online-only viewers are between 18 and 34.

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2Q09 1Q09 2Q08 %Diff


yr to Yr

Watching TV 284,396 284,574 281,746 0.9%


in the home

Watching 82.297 79,533 62,240 32.2%


timeshifted TV

Using the 191,035 163,110 159,986 19.4%


Internet

Watching video 133,962 131,102 119,164 12.4%


on Internet

Using a 233,722 230,436 221,651 5.4%


mobile phone

Mobile subscribers 15,267 13,419 9,004 70.0%


watching video on
a mobile phone

US TV and Video Consumption (in thousands)


Source: Nielsen, 2009

But do people truly prefer watching their video entertainment on their PC


or mobile device? In some cases, maybe. College students in dorms or small
apartments who must have a computer may choose a quality laptop with a high
resolution monitor because it takes up less space and because it can be used for
classwork, TV, DVDs, gaming, and more. However, once they have more money
and more space, would they really prefer to watch Avatar or the Super Bowl on
an iPad? Viewers’ attention is split more than ever, but they are still watching
TV. ComScore’s survey also found that the TV viewing experience—audio
and video quality and overall experience—is preferred over online viewing. Ten
million households in the United States connect their PC to the TV to be able
to watch that content in a larger format.88 And pay TV earned providers over
$84 billion in subscription revenue in 2009, costing a household an average of
$70 per month for 240 hours of TV entertainment.89

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Consumption of video content remains high. So are those 800,000 consumers


cutting the cord on TV? Or on the business model of TV? Charlie Rutman,
chief executive for the North American operations for international media
services company MPG, phrased it well at the network “upfronts” following
the 2007–2008 writers strike, “We’re in a world where it’s not about TV, it’s
about video. … [Networks] are not in the TV business, they’re in the video
content business.”90 When consumers talk about why they’ve moved away from
cable, satellite, and IPTV providers, they talk about economics, not a declining
interest in video entertainment. They talk about how the monthly fees they pay
no longer deliver value compared with other video content options.

Why is this?

1 Money – The plethora of free online video content. Nearly all network
television shows, and a small set of cable shows, are available for free
online. A 2009 Washington Post story mentioned one 23-year-old cord
cutter who said, “I wouldn’t say that watching TV online is about saving
money because it was never something that I expected to pay for in the first
place.”91 Even if not all shows are available during their TV run, viewers
can catch up on shows via iTunes, streaming from Netflix or Amazon.com,
and DVD releases. Some TV viewers also opt for over-the-air solutions,
including HDTV antennae.

2 Choice and convenience – The flexibility of delivery and mobility reigns


supreme. Take it from cord-cutter Danny Ledonne, a grad student and
video producer: “I don’t want an arbitrary television schedule telling me
when and where I’m supposed to meet it every night or every week. …I
want to watch when I want to, I want to be able to download it and listen
on the bike or watch on a plane, and I want to do it for free with minimal
advertising. Otherwise, I have better things to do.”92

The shift in video entertainment is about more than just cord cutting. It’s about
why these people are cutting the cord and what it says about the wider viewing
public, whether they’ve dropped TV service or not. TV service providers must

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deliver more flexible delivery options along with answering the money question
to create value—whether it means offering new services that beat cheaper
options or leaning on content providers to nix free because it may cannibalize
the revenue stream. The solution will probably entail both.

Of course, this issue is much bigger than the business relationship between
TV service providers and their customers. The business model for producing
television has remained relatively unchanged since the dawn of the soap opera
in the 1950s, and a vast web of corporations across different industries is built
to operate within that model, from production studios and networks to creative
unions to advertisers across the consumer landscape to Nielsen and its ratings
system. Shows launch in the fall, running roughly from September to May, and
go on hiatus for the summer when networks show re-runs.

The customary nine-month TV season has changed in recent years. And why?
Because cable networks, who relied more on subscription fees than ad revenue
and the TV calendar driven by it, began launching new series over the summer
and mid-season and gaining traction when network series were on hiatus. These
shows had shorter seasons (read: cost less), but had loyal fan bases. The writers
strike pushed the issue even further, as the declining appetite for repeats met the
softening economy in 2008. Advertisers widely praised networks’ willingness to
move to more year-round launches of new content and the resulting reduced
demand for them to purchase their entire ad inventory each spring at the
upfronts. (The upfronts are the networks’ annual unveiling of new shows where
networks pump up their fall schedules and sell their ad inventory upfront,
locking in income well ahead of time.)

Players on both sides are hesitant to walk away from the system that generates
billions of dollars in revenue for those involved. Networks like the idea of locking
in income well ahead of time. Buyers like securing better rates than they might
get later after a show is a hit. As challenged as various aspects of the business
model may be, as we’ll discuss, the main players are skeptical of alternatives. In
a recent article, Business Week explains their skepticism: “The makers of movies
and TV shows are attached to the billions they receive from cable companies
and are understandably reluctant to engage in grand experiments with upstarts

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touting unproven business models.”93 But consumers don’t care about their
business models, and not only are they watching network content online, but
consuming more and more alternatively developed content that doesn’t pass
through Hollywood. In response, the networks are trying to find ways to absorb
alternative technologies and content into their system.

The View from Inside


Take the example of the sitcom In the Motherhood. It began as a web series that
solicited story ideas online from mothers, allowed them to vote for their favorites
and then incorporated the winners into future story lines. The show was billed
as “By Moms, For Moms, About Moms.” The tight integration between the
viewers and the creators made the series a hit, illustrating how innovators can
use interactivity enabled by technology to drive increased customer engagement
and loyalty. Seeing the success of the web series, ABC brought it to the network.
And that’s where things went awry.

Once inside the studio system, “By Moms” went out the window in favor of
union writers. Submissions from viewers would continue, but authors of the
winning ideas wouldn’t get paid. Instead, viewers would get a screen credit. Story
ideas and writing for free didn’t make the Writers Guild of America (WGA) very
happy at all.

“‘This kind of call for submissions is not allowed for in the contract,’ says WGA
spokesman Neal Sacharow. ‘It’s not our goal to curtail experimentation, but
people who do the work should get paid for it.’ These kinds of submissions
deserve the WGA minimum, he added, which is roughly $7,000.”94

Producers certainly weren’t going to add the cost and headache of compensating
mothers across America and dealing with amateur contributors under union
rules. So the idea was scrapped. Gone was the one element that provided the
personalization that hooked women in the first place. Early low ratings killed the
series after just four episodes. Commenting on the demise of In the Motherhood,
Clay Shirky, new media consultant and teacher at New York University, said:

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The critical fact about this negotiation wasn’t about the


mothers, or their stories, or how those stories might be used.
The critical fact was that the negotiation took place in the grid
of the television industry, between entities incorporated around
a 20th century business logic, and entirely within invented
constraints.95

One might just blame the writers union for its inflexibility. However, the union
is reacting to a system that is squeezing out scripted shows in favor of reality
TV and game shows, which employ limited stables of writers. Why pay a writer
when some viewers are just as interested in the things Snooki might say while
drunk in a Jersey Shore hot tub? The writers are in the position of having to
protect their role in the content creation process. User-generated online content
(i.e., YouTube) is another example of the traditional content producers being
squeezed. Clay Shirky brings up a YouTube hit:

The most watched minute of video made in the last 5 years


shows baby Charlie biting his brother’s finger. (Twice!) That
minute has been watched by more people than the viewership
of American Idol, Dancing with the Stars, and the Super Bowl,
combined (174 million views and counting).… ”Charlie Bit
My Finger” was made by amateurs, in one take, with a lousy
camera. No professionals were involved in selecting or editing
or distributing it. Not one dime changed hands anywhere
between creator, host, and viewers.

Shirky was writing in April 2010. As of June, over 200 million people had
watched Charlie bite his brother’s finger. Ridiculous as it may seem, traditional
TV programming, even online, is competing for viewer attention with baby
Charlie, cats that play the piano, and endless Beyoncé wannabes singing
“Single Ladies.” At the end of 2009, GigaOM did a survey of online video
enthusiasts:96

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the shift

63% viewed user-generated content like videos on YouTube


37% viewed video on social networking sites like Facebook
32% viewed TV programs on broadcast websites like
NBC.com or CBS.com
27% viewed TV programs on aggregators like Hulu

The launch of In the Motherhood followed on the heels of the late 2007 writers
strike, which took original programming off the air for 100 days, knocked down
ad revenues, and left a bad taste in the mouth of everyone involved—writers,
actors, producers, and viewers. At the heart of the strike? Arguments over
distribution of profits from new media. Together, new media and reality TV
are generating anxiety for writers, as well as actors and directors who narrowly
avoided their own strikes. Part of the fallout from labor angst has been an
increased focus on surer bets. The studios have become highly risk averse, causing
a trickle down effect that has threatened agencies focused on lesser known talent
and offers TV and movie creators shorter leashes on budget and performance in
the ratings or at the box office.97

Once the anchors of a network’s offerings, the hour-long drama and the 30-minute
sitcom have been replaced on many nights by reality TV and game shows like
American Idol (Fox), The Biggest Loser (NBC), Survivor (CBS), and Dancing with
the Stars (ABC). Why? Money. You don’t have to pay for higher priced actors and
for writers to produce a season’s worth of scripts. It costs $3-5 million per episode
to produce an hour of primetime broadcast television, with some shows going
over $10 million for big-name talent.98 TV series are deficit financed, and turning
a profit requires producing enough episodes to get the series into syndication.
Today, series get a much shorter time to build an audience.

Cable networks have had some success offering up the traditional formats, like
the hour-long drama, profitably and with 25%–30% lower cost than equivalent
broadcast programming.99 First, and most importantly, they have subscriber
fees to supplement revenue. Second, they order a limited number of episodes,
which was initially done because they would be introduced for a shorter summer
season as an alternative to re-runs. It’s now par for the course. Third, they have
high international orders. For example, The New York Times reports that FX’s

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Damages is sinking in the ratings, but has international orders for $2 million
per episode. Lastly, for dramas that catch fire with a loyal audience, DVD sales
become a strong revenue source. Over the long haul, broadcast TV dramas are
generally more profitable—ironically because they get long-term revenue from
syndication to cable networks. But upfront, the risk and cost associated with
launching a show makes cable a safer bet.100 And syndication requires production
of at least 100 episodes, typically a five-season run.

In the end, profitability for the networks increasingly depends on subscription


fees. Advertising isn’t enough to sustain content delivery either to the TV or
to the PC. Hulu and YouTube have lots of viewers and the media abounds
with grand revenue estimates, but it’s an ongoing question whether they’ve
turned a profit. Broadcast networks have seen advertising dip as brands begin
spreading their budgets across new media. While ads still deliver billions in
revenue, the trend toward new media will continue. Hulu, a joint venture
between ABC/Disney, Fox, and NBC Universal, allows those networks to
capture some of that revenue themselves, but in 2009, the advertising dollars
just covered the cost of distribution—hence the explanation for the launch
of its premium service.

In 2010, Hulu is expected to make more than $240 million—more than double
the $108 million it drew in 2009.101 Viewers and ad revenues have increased,
and as we mentioned in our chapter on advertising, Hulu also introduced more
personalized ads with improved targeting and user profiling. In addition, the
cost of serving ads has been distributed between Hulu and content partners, and
the mix of subscription fees has created a new business model that networks are
invested in developing. As Kit Eaton wrote in Fast Company:

“What the online video business does reveal is that Hulu is less
about delivering futuristic TV experiences for its users, and
more about being a money mill to generate cash for its TV
show producing lords and masters. It’s also a nice little system
that gives these content providers a claw-hold in future TV
delivery models.” 102

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the shift

Hulu CEO, Jason Kilar, has said as much himself, reiterating that “Hulu, Hulu
Plus, and Netflix have all been consciously designed … not to be a substitute for pay
TV services” as they lack sports and other content.103 Embedding the Hulu Plus
application in consumer devices has also become a way for Hulu’s network owners
to get their piece of the connected TV and set-top box pie.

Broadcasters and content producers still look to subscription fees for substantial
revenue. NBC Universal’s TV arm relies heavily on its cable properties like
MSNBC, USA, and Bravo for income.104 Now, NBC itself and the other
broadcast networks are trying to get a piece of that action, which research firm
SNL Kagan estimates could be more than $1 billion this year and reach $2 billion
by 2014, which is still well below the $37.3 billion in fees basic cable networks
will get in 2014.105

Getting more money out of the TV service providers, however, isn’t a guarantee
and deals are often worked out on a provider-by-provider and region-by-region
basis. Squabbles over providers paying the fees to carry certain networks—
both broadcast and cable—have resulted in loss of access to TV content for
subscribers. For example, battles between Scripps and Cablevision in the
northeast resulted in 3 million homes in New York, New Jersey, and New
Hampshire losing the Food Network and HGTV. Eighty thousand viewers
complained to Cablevision, which has refused to re-open negotiations.106 So
who gets blamed? Everyone. And that only provides more reason to opt out of
the system (and their business model) altogether.

Assuming providers do pay the networks additional fees, in the end that cost will
be passed on to consumers, at least in part. How long can that continue given
the growing number of people who have already decided the price isn’t right, the
product isn’t worth it, and they have other options? Charging people more for a
product that is in essence the same certainly won’t help.

“In order to keep growing those fees, (networks) have to deliver some blockbuster
programming,” said SNL Kagan analyst Robin Flynn.107

In one sense, the analyst is correct. In fact, one of the caveats for many online

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video solutions—over the top and the cable companies’ TV Everywhere


initiative—is the lack of some of the most attractive TV content, which is on
subscription-based cable channels that have been more hesitant to strike content
deals with services like iTunes. Content will always be important. But this also
takes us back to Charlie and his brother’s finger. Baby Charlie gives viewers a
blockbuster, heart-string-tugging moment that they can connect with for free
and without a single pitch meeting, power lunch, or development deal. Upping
the ante on what’s in TV shows that are produced and distributed in the same
system without addressing escalating costs for big-name talent, limitations on
studios’ ability to cut production costs, and threatened revenue sources doesn’t
address the core problem. Too often, the answer has been about shoving new
technologies and new ideas into the old system, instead of changing the system.

Continuing his discussion of entertainment business models broken by their


own complexity, Clay Shirky writes:

When ecosystems change and inflexible institutions collapse,


their members disperse, abandoning old beliefs, trying new
things, making their living in different ways than they used to.
It’s easy to see the ways in which collapse to simplicity wrecks
the glories of old. But there is one compensating advantage for
the people who escape the old system: when the ecosystem
stops rewarding complexity, it is the people who figure out
how to work simply in the present, rather than the people who
mastered the complexities of the past, who get to say what
happens in the future.108

So what is the way forward? This remains to be seen, but new players, driven by
applications development, will shape the future of video content delivery and
the nature of TV services.

TV: The New App Storefront


By 2015, 60% of TVs will be shipped with Internet connections and 70% shipped
with embedded applications.109 This is in addition to the Internet-connected set-top

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the shift

boxes, Blu-ray players, gaming consoles, and other devices now in American living
rooms. Companies including Yahoo!, Netflix, and VUDU are already leveraging
that capability with apps embedded in devices that provide video streaming,
interactivity, and e-commerce directly to the TV with remote control navigation.

Yahoo!
Yahoo! was one of the first to get its platform integrated into consumer devices,
and, from its launch in mid-2009 to September 2010, Yahoo’s Connected TV
platform had shipped with 3.5 million TVs.110 Available widgets include social
media apps from Facebook, Twitter, and Flickr and streaming widgets from
Amazon, Blockbuster, and CinemaNow. Yahoo! is still exploring how it can
serve up advertising, which will be essential to its long-term survival. Another
downside for Yahoo! and others rolling out embedded TV applications is
fragmentation due to the number of providers and devices. For developers, this
means to get an application in the market there are numerous approvers—the
service or app store owner and each device manufacturer.

Netflix
The Netflix “Watch Instantly” service allows subscribers to stream content instantly
to their PCs as well as via set-top devices. Thus far, according to GigaOMPro, of
the Netflix users who have home broadband, one-third use the service exclusively
on their PCs, 8% view the content exclusively on their TVs and 24% use both their
PCs and TVs.111 The Netflix service, and others like it, combine the convenience
of online viewing with the preferred experience of TV viewing. This recipe lends
itself to exponential bandwidth demands of the underlying broadband networks
providing this instant viewing experience, with Netflix now accounting for 20% of the
downstream Internet traffic in the United States between 8:00 p.m. and 10:00 a.m.112
Further, there is evidence to support Netflix’s cannibalization of paid TV service,
with 37% of Netflix subscribers between the ages of 25 and 34 saying they use
Netflix instead of a paid TV service and 30% of its customers aged 18–24 stating
the same.113 Netflix announced in September 2010 that it would begin streaming a
new cache of movies from Epix, which owns the digital rights to Paramount, Lions
Gate, and MGM films.114 Netflix is paying $900 million over the next 5 years for
the privilege of including newer movies like “Iron Man 2” in its instant streaming
service. Part of the trade off for digital distribution is longer wait times for content,

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but it’s one Netflix is willing to make as it shifts away from physical distribution
models—a move that will allow Netflix to reduce or eliminate the $600 million the
company spends annually in postage.115

VUDU
VUDU is focused on delivering online video to the TV with a proprietary
encoding format optimized for screens over 40 inches and has numerous
deals with TV manufacturers, including Vizio, LG, Samsung, and Toshiba. Its
influence will only increase following its $100 million acquisition by Walmart
in February 2010. Backed by the world’s largest retailer, VUDU gains significant
leverage with device manufacturers.

In addition to embedded applications, there are browser-based platforms, such


as Boxee and Kylo, designed to provide the same online video content access
by connecting a PC to the TV. The advantage of browser-based platforms is
that they can take advantage of the capabilities of the PC’s CPU and operating
system, providing greater functionality than what’s available from within an
embedded app. There had been resistance from content owners worried about
cord-cutting among pay-TV subscribers. However, Boxee and VUDU both
added access to the Hulu Plus paid premium service in November 2010.

Google TV
In May 2010, Google announced the “Google TV™” platform, which launched in
the fall of 2010, via a partnership with Intel and Sony. Consumers get Google TV
either in the form of a Logitech set-top box or embedded in Internet-enabled Sony
TVs. Google TV combines an Android-based embedded application platform,
a version of the Google Chrome™ browser, and a full version of the Adobe® Flash®
player. At the Google TV announcement, Sony Chief Executive Howard Stringer
also announced, “Sony was likely to gradually adopt Google’s software, which he
cited as more robust and comprehensive than the company’s own Bravia Internet
service, for its other Internet-connected TVs.”116

On one hand, Google’s offering is very similar to what’s already on the market.
On the other hand, it’s Google, and also on stage with the Google, Sony, and
Intel executives were executives from Best Buy, Dish Network, and Adobe.

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Unlike the niche players that have popped up in this space, Google has the
influence to achieve what others couldn’t with regard to standardization and
ubiquity. Applications developed for Android mobile devices will also work on
the Google TV platform. Plus, Google already has a strong relationship with
advertisers via its online and mobile search properties.

What it doesn’t have are attractive TV content partnerships. The four major
networks—ABC, CBS, NBC, and Fox—have all refused to pony up their
content. Viacom has pulled access for its properties, including Comedy Central,
Nickelodeon, and MTV. Even Hulu, which has made its Hulu Plus content
available to other consumer devices, blocks Google TV users. 117

Industry analysts also point to the 10%–15% premium for the Blu-ray players and
TVs and lack of clear value proposition for Google’s trouble.118 Slow sales prompted
Sony to announce a $100 price cut for its newest Google TV the weekend after
Thanksgiving, the busiest, most important shopping days of the year.

Without content and viewers, it will be hard for the industry to capitalize on
the hope for Google’s entry into this space—its advertising advantage. One
Hollywood industry watcher promoting the promise of Google TV and updates
to the Apple TV platform asked:

What happens when TV [ad] inventory is no longer a gamble?


What happens when we no longer need to guess on the
audience for new shows—when the platforms will tell us what
the actual audience is, and we’ll be able to deliver a targeted TV
message, in close to a real-time model? What happens when
marketers demand the same accountability in TV that they do
from digital, and TV truly morphs into a digital platform?”119

The possibilities for Google TV will be wide open for development. Google is
releasing a developer toolkit for TV-based apps and a new version of the Android
Market in early 2011.120

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Apple TV
Announced by Apple CEO Steve Jobs in fall 2006, Apple TV didn’t meet
with nearly the same success as other recent Apple innovations. With Apple’s
latest Apple TV product, announced at the end of August 2010, the consumer
electronics leader hoped to change that. In addition to the reduced size and
reduced pricing, Apple also eliminated storage on the device. Instead, the box—
just one-quarter the size of its predecessor—streams content from the cloud and
the Internet (via iTunes, YouTube, and Netflix). The new Apple TV has built-in
Wi-Fi® for simpler integration into the home entertainment setup.

At the same time that Apple announced its new hardware, it announced the
availability of 99¢ TV show rentals for standard and HD content. The cheap
TV rentals are an iTunes offer that initially includes just Fox and Disney network
properties. Interestingly, Amazon.com immediately countered the same day with
its own 99¢ TV content, pitting its Video on Demand application on numerous
consumer platforms up against Apple’s walled garden approach. As one blogger
put it, “[T]his move from Amazon should make some consumers look closely at
their current equipment before dropping $99 on the new streamer. I count three
devices in my house with Amazon Video on demand.”121 In the first edition
of The Shift, we talked about the wide speculation around the next Apple TV
device, and in the end, the prognosticators who bet on leveraging cloud storage,
media portability, and a consumer-friendly price point won out.

One clue came from Jobs himself, speaking at the “All Things Digital” conference
in May 2010. Jobs described what he sees as a go-to-market problem with the
digital living room and the “subsidized business model that gives everyone a set-
top box for free or for $10/month.”122 He declared that this quells innovation and
results in a living room full of divergent set-top boxes, remotes, and user interfaces.
As Paul Sweeting at GigaOM Pro reported, “The only answer, according to Jobs,
is to ‘go back to square one and tear up the set-top box and redesign it from
scratch.’”123 Consumers don’t seem to be turning away from adding more boxes
to their TVs just yet—if it means getting the content they want. Although, as we
mentioned in our introduction, business models are ripe for change as long as
they require consumers to be living room network integrators/technicians just
to get their needs met.

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Sweeting explains why a move toward a cloud-based media service makes sense:

Its goal is likely to be to provide seamless, cloud-based access


to content—both your existing libraries and what you acquire—
across the TV, the iPad, the iPhone, and any other device it
might come up with. In addition, the iTunes App Store will
eventually serve as Apple’s platform for delivering cloud-based
subscription and on-demand content aggregation services—
including video content—across multiple Apple devices—in
effect, an all-Apple TV Everywhere service.124

Another consistent note among the prognosticators was: “The glaring


opportunity is for Apple to bring the App Store to TV. With access to millions
of applications—including games—on a big screen, the television would finally
become engaging.”125 Gaming is a highly lucrative market where neither Apple
nor Google have a traditional play with a gaming console for the living room.
Thus far, Apple still has no living room gaming play, but the Apple TV box
certainly provided an interface for new applications.

The Shift Toward Consumer-Centric Video


All signs point to a shift in the video entertainment business that will sustain
video delivery across platforms because that is where consumers see value.
Somehow, the various players will organize around that fact despite the tenuous
relationships between talent, production companies, broadcast networks, cable
networks, local affiliates, TV service providers, and on and on. Those who don’t
won’t survive, but the video content industry will continue without them.

As we covered in our chapter on advertising, wherever the consumer’s eyes go, ad


dollars will follow. So advertising will continue to be part of the revenue mix and will
require audience measurement. That revenue will be in the mix with subscription and
per-use fees for access to a blend of media services and applications across platforms.

Our own consumer research dovetails with the direction of the video innovators,
like Google, Apple, Netflix, and others. Consumers are willing to pay for seamless

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delivery of entertainment across all their devices with the same quality and
features they get when they are sitting on their couch. In addition, they want a
blend of traditional video content (TV, movies) with user-generated content—
from sources like YouTube or personal video content generated by themselves or
their social network.

Any provider of video services must be in the position to support a unified service
profile across the variety of media sources, which requires centralized identity
management, billing, and management of the user’s digital rights—not for
intellectual property but for video sharing between users in a social network. The
question is: Who is in the best position to provide profile management not only
for these services, but for the blended applications combining social networking,
gaming, and communications? Plus, in order to support any kind of ad-based
revenue, that profile information will need to be aggregated, so that some form of
targeting and ROI measurement can be provided to advertisers. We believe this is
where the service provider offers the strongest value. Our research of 1,000 online
video enthusiasts in North America shows that these consumers trust their service
providers—phone, Internet, and mobile—more than developers of over-the-top
offerings, and they are more likely to look to service providers for support. Cable
and IPTV companies are seeking better monetization of their video investment,
and regardless of how the industry shapes up, they should be active players.

Putting It All Together


However you slice it, the foundational business models supporting video
delivery since the introduction of television are on shaky ground. Indeed, this is
about content, not devices, and about personalization, not television schedules.
As such, timeshifting is a given and placeshifting has become commonplace.
Not only are video business models under pressure, but video demands highly
capacious networks. Video is bandwidth-hungry. Accordingly, service providers
looking to monetize the exponential bits and bytes traversing their networks are
wise to examine the new breed of video enthusiasts:

> Despite having significantly lower willingness to pay than other


respondents (including gamers and connected parents), video enthusiasts

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the shift

will pay for enhanced services. Specifically, multiscreen services that allow
the seamless shifting of content from device to device and augmented
reality services that provide visual recognition of an object viewed through
a mobile device (such as a movie poster) and render a related multimedia
asset back to the user (such as a movie trailer) for action (such as ordering
the movie for delivery to the user’s TV set-top box or mobile device)
command high interest and willingness to pay from these consumers.
> These consumers are primed for higher quality video. Among the APIs
tested, QoS scored particularly well among this bandwidth-hungry audience.
> The business model matters. These users are more likely to prefer a
monthly fee plan versus pay-per-use or one-time fee options. To optimize
revenue, providers should offer services with nominal monthly fees.
> Like their Web 2.0 counterparts, these users are very tolerant of high-
frequency advertising as part of their service definition. Plus, they are
more likely to trust their service provider over their application developer
with sensitive profiling data. This is the one-two punch that puts a
service provider in a unique situation to augment lower subscription-
based fees with targeted advertising revenues for a segment acculturated
to advertising-based models.

The seismic shifts to the video business model make the abandonment of landline
phones look uneventful by comparison. Indeed, video has the potential to
simultaneously be the biggest disrupter and opportunity for stakeholders across this
ecosystem. To capitalize on the benefits, players must be willing to break ties with
conventional thinking and business models and embrace an increasingly tech-savvy
audience. Doing so could mean the difference between survival and extinction.

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SOCIAL
chapter 9

networking
monetizing billions
of conversations

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Key Chapter Highlights


Seven percent of the world’s time spent online is
spent on Facebook and two out of every three
global web users visited a social networking site in
December 2009.

Social networking is here to stay because it


suits the “socializer” behavior patterns of the
next generations and provides connection and
community in this high-tech world. As pervasive as
sites like Facebook may be, social networking is an
activity and mode of communication, not a website.

Monetizing social networking isn’t just about putting


display ads on social networking sites like Facebook.
It’s about leveraging the role social networking as an
activity plays in the lives of consumers in numerous
ways to build trusted, interactive relationships that
generate more revenue.

Social networking sites are becoming a resource


for consumers seeking personal recommendations
and buying information, making it a potential threat
to paid search advertising. Social networks offer
the means for behavioral targeting and increased
brand-consumer engagement, which (as mentioned
in the advertising chapter) increases the value of ad
inventory.

Privacy, privacy, privacy is key—all requests and uses


of consumer data must be opt-in and transparent,
and policy changes must be clearly communicated
in plain language, in advance.

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> The buzz around social networking and media is


fascinating from a sociological and cultural perspective. In the press, social
networking has become a bellwether for the health (or ill health) of society
at large as older generations bemoan how younger generations are too open
online and don’t seem to care about propriety or privacy. Whether this is true
is debatable, but it certainly makes attractive headlines since people throughout
time have loved to complain about “these youth today.”

The more pertinent conversation for our purposes, however, is about how
the rapid growth of social networking as a player in the Web 2.0 world can
be leveraged successfully to create business opportunities for the application-
enabled ecosystem. In our conversation, we’ll differentiate the terms social
networking and social media. Social networking is the activity and way of
communicating that people practice. Social media are the websites, applications,
etc.—including Facebook, MySpace, Twitter, and so on that are the forums for
social networking. Whatever we might think about the positive or negative
impact of particular social media, social networking as an activity and way of
communicating is already shifting Internet business models and opening up new
angles for marketers to increase customer engagement.

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the shift

The rise of social networking as a practice has made social media a force in our
cultural, technological, and personal lives. Today, Facebook is the big climber,
consuming 7% of the world’s time spent online and becoming the fourth largest
site in terms of reach, behind only Google, Microsoft, and Yahoo!.126 There are
exceptions to Facebook’s dominance in a few countries. For example, in Brazil,
Facebook’s reach is just 20% compared with 72% for Orkut, Google’s social media
outfit, which failed to reach mass adoption in North America. 127 And while the
reach of the search and portal sites may be higher, Facebook and YouTube draw
much more of users’ time. For the first time ever, in August 2010 US web users
spent more time on Facebook than on Google.128 Overall, two out of every three
global web users visited a social networking site in December 2009.

The Threat to Paid Search


As we mentioned in our chapter on advertising, paid search is the big dog on
the block of Internet ad revenue, comprising nearly half of online ad dollars
spent. The presumption is that when users are searching for information to
make purchasing decisions, what comes up during a web search is a dominating
factor in their decision making. That dominance, however, may be changing.
Today, search is being augmented more and more with other Internet navigation
options. Jon Gibs, a media analyst for Nielsen Research, conducted a study of
how Internet users discover content and made a significant discovery.

There is a segment of the online population that uses social


media as a core navigation and information discovery tool;
roughly 18% of users see it as core to finding new information.
While still a smaller percentage than those who use search
engines or portals like Yahoo! or MSN, it is a significant figure.129

Of these 18%, whom Gibs calls “socializers,” 26% agreed with the statement, “There
is too much information online,” versus 18% of portalists (viewers of customizable
portals and topic-specific sites, like CNET). Only 5% of searchers, who represented
37% of total respondents, agreed. Gibs offers a reason why social media may be a
preferred means of navigation and content discovery for a subset of web users.

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Socializers trust what their friends have to say and social


media acts as an information filtration tool. This is key because
Socializers gravitate toward and believe what is shared with
friends and family. If your friend creates or links to the content,
then you are more likely to believe it and like it. And this
thought plays out in the data.130

The idea that social media will overtake search, if not make it obsolete, is echoed by
the GigaOM Pro report, “Why Google Should Fear the Social Web,” which states:

In our modern, highly networked lives it is getting increasingly


difficult to find relevant information on the web, quickly. The
10 blue links paradigm, popularized by Google, appears to be
reaching its limits.

While this seek-search-and-consume methodology has become


part of our basic Internet behavior and turned Google into
a gazillion dollar company, it may be time for us to look for
alternatives.131

This doesn’t mean that search goes away, but it does mean its dominance as a
source of information, such as product information used to make purchasing
decisions, may be challenged by content discovery mechanisms that provide a
guide to navigating the overwhelming volume of information online. As user
interaction with the Web becomes more mobile, this is particularly true and
has led to companies like ChaCha, a mobile service by design, but one that also
gets 20 million hits each month to the archive of answers on its website.132 Gibs
doesn’t provide a demographic breakdown of socializers, portalists, and searchers,
but some evidence suggests younger generations are more likely to be socializers.

Think about the shifting generational view of information. In our chapter


on the Millennials, we discussed that generation’s shift away from one-way
communication delivered from an authoritative source (a newspaper, a college
lecturer) and toward more interactive communication where the recipient is
an active participant in creating, challenging, and shaping the information that

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the shift

person will ultimately receive. Today’s users crowdsource their information. And
what better crowd than their online networked community? I can search Google
for information about restaurants and hotels in Denver or I can ask my “tweeps”
or pose the question in my Facebook status. While it doesn’t offer a quick response
like Google, I trust my social network and its response to me is truly personal.
When Nielsen asked consumers which form of “advertising” they trusted:

90% said recommendations from people they know


70% said consumer opinions posted online
70% also said brand websites
69% said editorial content, like newspaper articles
Traditional media advertising rated just behind
objective recommendations: 62% trusted TV ads, 61%
for newspapers, 59% for magazines, 55% for radio and
billboards
New media advertising rated low by comparison: 41%
trusted search engine ads, 37% online video ads, 33%
online banner ads, and 24% mobile text ads—except for
opted-in emails, which scored 54%133

Two key ideas emerge from the Nielsen data. First, objective recommendations
carry more significant weight. Social networking and media clearly facilitate
the ability to reach out for those recommendations and crowdsource buying
information. Second, the higher ranking for opt-in emails and the very high
ranking for brand websites suggest that information delivered directly from
the brands that is sought (by visiting the website) or asked for (through opt
in) garners trust from consumers. We discussed the impact of this fact in more
detail in our chapter on advertising. Permission-based marketing is the key to
gathering the consumer data needed for more targeted advertising that builds
stronger brand relationships without turning off consumers.

Microsoft and MIT surveyed some Microsoft employees and summer interns
on what questions they ask their social networks. Many of the questions involve
some kind of purchasing decision—product recommendations, buying options,
choices for dining out, and information about product use. Today’s search

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engine tools are expanding the visibility brands have into their social networking
mentions, which adds a unique wrinkle to the social networking privacy
debate, as we’ll see later. Consumer inquiries via social media are a marketing
opportunity for brands to create more responsive customer engagements. While
this is a sample that probably skews younger and more technologically engaged
than might be average, the results are still quite interesting.

Question Type Percent Example

Recommendation 29% Building a new playlist – any


ideas for good running songs?

Opinion 22% I am wondering if I should buy


the Kitchen-Aid ice cream
maker?

Factual knowledge 17% Anyone know a way to put Excel


charts into LaTeX?

Rhetorical 14% Is there anything in life you’re


afraid you won’t achieve?

Invitation 9% Who wants to go to Navya


Lounge this evening?

Favor 4% Needing a baby sitter in a big


way tonight... anyone??

Social connection 3% I am hiring in my team. Do you


know anyone who would be
interested?

Offer 2% Could any of my friends use


boys size 4 jeans?

Source: “What do people ask their social networks?” GigaOm.com blog post, February 22,
2010, http://gigaom.com/2010/02/22/what-do-people-ask-their-social-networks/

And at any rate, the flood of information on the web affects older web users
as well. As mentioned in the Baby Boomer chapter, this generation is under

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the shift

significant time pressures and craves simplicity as a result. Baby Boomer


participants in an AARP focus group discussed looking for new ways to navigate
the online world.

“Do I need more information? The problem becomes filtering


and sorting—you have all this information coming at you, what
does it mean and how do you shut out the part that doesn’t
matter to you. And then how do you make sense of it?” Said
another: “It’s getting harder and harder to sift—there’s far more
information out there than one person can absorb.” … [M]any
thought that, once again, technology itself will help with the
issues of control and too much information: “I love things like
the Amazon suggestions, and Netflix preferences. There are so
many choices we have everywhere, so for someone to narrow it
down for you, that appeals to me.”134

Personal recommendations—even from mostly strangers—are a welcome way


for these older users to focus their searches, get feedback, and narrow purchasing
decisions. Truly personal recommendations, one can assume, would be even more
welcome. Search engines can only get so personal before privacy groups start
screaming. And while there are certainly privacy concerns with social networks,
in the end, users decide what information they want to share with their friends.
Those interests and preferences are available to their social networks in addition
to data gleaned from face-to-face communication and personal relationships,
which cannot be mined by a machine.

As one blogger who believes Twitter will be the new search engine wrote:
“Search engines have no personality and don’t engage in conversation. It could
be considered an invasion of privacy if search engines used previous search
information. There’s no such expectation from public conversations.”135

Behavioral Targeting: Boon or Bane?


Earlier, we mentioned the application of web crawling and data mining tools to
social media to provide brands with an enhanced view of consumer behavior and

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preferences. The next step for brands is to apply the knowledge they gain to deliver
targeted or even personalized advertising and marketing. As to be expected, targeted
marketing that takes advantage of the data that is collected on subscribers via social
media takes many hits in the press as consumer groups raise concerns about privacy
issues. Naysayers argue that people are not participating in social media to be sold
stuff—no matter how attractive what they do there may be to marketers.

Another problem arises when your social media updates aren’t just stored within
the walls of that application anymore. As one blogger predicted in December 2009:

The real trouble will start when Facebook starts sharing these
status updates with the search engines and other third parties.
… Up until now, Facebook alone has maintained control over
the vast majority of content uploaded to the site. Get rid of
it on Facebook, and it’s usually gone, at least from the prying
eyes of a stranger.136

Opening up profiles for indexing on search engines keeps information around


for much longer. Getting rid of it on the social networking site, doesn’t mean
getting rid of it on the Internet, even if that’s where the content originated.

Negative responses flooded the press in April 2010 when Facebook announced
that it has partnered with sites—Microsoft Docs.com, Pandora and Yelp—
on a new feature called “instant personalization” made possible through its
Open Graph programming interfaces. At the heart of the concern is perceived
consumer discomfort with unknown eyes on the Internet keeping track of
where you’ve been, what you’ve been doing, and making decisions about
what this means about you in order to “personalize” your web experience. In
the case of Facebook and its partners, this means delivering content such as
articles and ads that are tied in with aspects of your Facebook profile. Have
you fanned your favorite band’s Facebook page? That’s the music that shows
up on the Pandora home page when you visit the site.

But how sensitive are people to privacy concerns over commercial “intrusion”
into their social networks? The answer is somewhat TBD. While studies show

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the shift

that younger generations are more comfortable sharing information online,


no one yet knows if this is generational or maturational. Today, according to
a recent Pew Research study, one in three Millennials shares at least five pieces
of information online for others to see, compared to 17% of Gen Xers, 20%
of younger Baby Boomers, and 15% of older Baby Boomers. Will they age
out of their open attitudes? At the same time, statistics show that younger
demographic groups actually filter what information is available about them
online more actively than older groups. This same Pew study offers some key
statistics about web users aged 18–29:

> Taking steps to limit personal information available online – 44% of young
adults say they do this, compared with 33% of adults aged 30–49, 25% of
those aged 50–64, and 20% of those aged 65 and older
> Changing privacy settings – 71% of social media users aged 18–29 have
changed the default privacy settings on their profile to limit personal
information versus 55% of users aged 50–64
> Deleting unwanted comments – 47% of social media users aged 18–29
have deleted comments that others have made on their profile versus 29%
of those aged 30–49 and 26% of those aged 50–64
> Removing their name from photos – 41% of social media users aged
18–29 say they have removed tags to identify them in photos versus just
24% of users aged 30–49 and only 18% of those aged 50–64137

Of course, it is possible that younger demographics are doing more embarrassing


things that must be edited out of their increased presence online, but regardless,
they are paying more attention.

More conflicting statistics are available concerning targeted online advertising.


Sixty-four percent of respondents to a March 2009 TRUSTe-sponsored survey
said they would choose to see only online ads from online stores and brands that
they know and trust, and 53% said they would take an anonymous survey about
their preferences in order to limit ads to those that are relevant to them. Yet, half
of respondents are uncomfortable with advertisers using their browsing history
to serve relevant ads, which did trend down 6% year over year.138

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So therein lies the conundrum: Even though studies point to how effective
targeted ads are and how much consumers prefer them, consumers are nervous
about exposing their information in order to make that possible. They, as we
say repeatedly, want control over their options and transparency from those
providing the services. Consumer education about how information is gathered
and used also contributes to the openness that can reduce fears and prompt
consumers to embrace the benefits of targeting that they themselves recognize—
establishing a relationship they have with brands they like and trust.

Much of the anger directed at Facebook, and there’s been plenty, is over
how often the site changes its privacy policies, how veiled these changes
seem to be, and how flippant Facebook leadership has been in the past when
answering questions about user privacy. This has led to a lack of consumer
trust in social media and in online advertisers. Facebook has responded by
rolling out “simpler” privacy controls in June 2010, complete with a new
privacy guide and video tutorials to help users gain the control they want.
The social media world has responded by offering up new “un-Facebook”
sites that work on an opt-in rather than an opt-out basis, such as Diaspora, a
“privacy aware, personally controlled, do-it-all, open source social network”
founded by students at New York University, and Pip.io, a “self-described
‘social operating system.’”139, 140

Our research across 2,000 US Web 2.0 consumers reveals a similar story.

> About 40% of consumers were “very comfortable” sharing their


availability information with trusted service providers (Internet, TV, and
mobile), application developers, and people they know.
> Thirty-two percent of respondents were “very comfortable” sharing
location information and information about online activities.
> When told they would have also have control over who saw their
information or when others saw their information, take rates for being
“very comfortable” sharing information went up to nearly 50% across the
three categories (availability, location, online activities) overall.
> Having control over who saw their information was more important than
having control over when others had access for all demographics, except for

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the shift

with location information for consumers aged 30–44 (42% vs. 55%) and for
urban consumers (44% vs. 53%). Bo.th groups showed a strong preference
for being able to determine when they were sharing where they are.

In the end, the question always comes back to value. Consumers like having
messages and services targeted to them and enjoy the benefits of sharing information
to connect with others; providers and application developers can monetize those
preferences if they provide access control to mitigate privacy concerns.

Social Networking Plus…


These discussions reinforce the importance of seeing social networking as
an activity, a conversation, a mode of communication that extends a person’s
natural inclination to connect, not a website or a widget. As an activity, it has
intrinsic value to consumers. The key to monetizing social networking through
media is to maintain that value for the consumer so when you combine it with
other applications and activities, your offerings aren’t just of value to marketers.
Consumers also have to be interested in the resulting applications and are, in
some cases, willing to pay for them directly.

… Presence
Another outcome of our consumer research was the importance of presence
to social networkers. As a single network API, presence was the most popular
capability as indicated by our respondents. Not only were consumers most
willing to share their presence, but they were most interested in applications
that gathered presence information from friends in their network. Of the
applications we tested, social networkers were very interested in an advanced
friend finder application, which would allow a user to contact friends on their
most accessible devices and know when they are in close proximity to a favorite
location where they can meet. The friend finder application also includes some
location-based information.

… Location
As we mentioned in our developer chapter, using a site like Foursquare, you can
become the Mayor of your favorite Thai restaurant or the Starbucks closest to

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your house. Tie that together with Facebook or Twitter or use Facebook’s Places
feature, and now your network has just seen your personal recommendation and
is prompted to check out that business. And, advertisers are keen to jump on
board with enhanced business models that also provide value for consumers via
offer notifications, coupons, etc. delivered to the mobile device as a reward for
customer loyalty or referrals.

… Gaming
Social media gaming has become a big business and changed industry ideas
about gamers. Who is the average social gamer today? A 43-year-old working
mom (48 in the United States), not a teenage boy living in his parents’
basement as one might expect. Women make up 55% of social gamers in the
United States and almost 60% in the United Kingdom, most often playing
with their friends. They are among the most avid social gamers with “38% of
female social gamers saying they play social games several times a day, vs. just
29% of males.”141 Much of this is due to social networking games like Mafia
Wars, Farmville, and Happy Aquarium.

Social gamers skew older and more female because the games are simpler to play
without additional equipment over shorter time periods. They are mostly free
and don’t involve the intricacies and violence of traditional gaming. Working
moms don’t have hours to spend to get to the next level of a game with a headset
and special controllers. They also have less interest playing against strangers
online and more interest playing with friends in their social network. Social
networking plus gaming has created applications of universal appeal, opening
the lucrative gaming market to new users.

For developers, social networks opening up their applications is creating


opportunities for new mashups that capitalize on the “socializer” trend,
monetizing the consumer’s desire for controlled connectedness. Adding the
capabilities of the service provider magnifies that value even further. Not only
can service providers open up the network for blending all a user’s services with
a socializing component, but they are a trusted partner in a position to ease
consumer’s privacy concerns. Together, developers and providers can turn the
social networking trend into a wealth of market opportunity.

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the shift

We’ll discuss social gaming in more detail in our next chapter where we will
show more examples of how the two worlds of social networking and gaming
are increasingly colliding.

Putting It All Together


Social networking is here to stay. The challenge for those in the ecosystem is
in attempting to monetize what is now a Web 2.0 behemoth, especially when
consumers are accustomed to free service and sensitive to privacy considerations.
To do so, one must offer these users incremental value. As a start:

> These users are interested in obtaining more information about their
social circle, including the presence, location, and preferences of their
friends. However, they are less comfortable sharing such information
about themselves. Herein lies the very interesting paradox that makes
tapping into these social networkers so challenging.
> Providers should never underestimate the importance of privacy. Privacy
must be opt-in and temporal. That is, consumers must remain in full
control of who has access to their information and when that access is
granted. Consumers must remain in the driver’s seat and the roadmap must
be clear and conspicuous. Providers choosing to bury their privacy policy
in an onerous licensing agreement will pay the ultimate price—lost trust
among these consumers. Privacy settings must be simple, transparent, and
fully controlled by the consumer. Anything short is unacceptable.
> Social networkers are the most price-sensitive of all groups tested
(including gamers, connected parents, and online video enthusiasts).
That said, they are still willing to pay for certain capabilities, including
presence, location, and profiling.
> The business model matters. Providers seeking to optimize revenues
among this price-sensitive base should offer the features on a per-use
basis. Monthly and one-time fees are less attractive to this audience.
Instead, providers should let this price-sensitive audience ease into a
commitment by offering services for a nominal per-use fee.
> For this segment, it is all about trust. And, the good news for network
providers is that these respondents are more likely to trust their operator

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over their application developer with sensitive preference data about


themselves. Combine this with an audience that is also highly tolerant of
advertising in their service definition and an operator has the potential
to succeed where so many before have failed—monetizing the profile of
these users by brokering the relationship between them and advertisers.

Perhaps the best reflection of this new era of social engagement comes from
our focus group respondents who were self-professed experts on the topic. For
them, social networking is a chance to connect with others on their time, an
opportunity to maintain friendships when traditional modes of communication
fail and a chance to be at the center of their virtual world. They want access to
the most sensitive details of their friends’ lives but are uncomfortable sharing
such information about themselves. They are simultaneously voyeurs and
exhibitionists, friends and narcissists. Perhaps these multiple layers are what
make this segment so difficult to target. But, players who are willing to embrace
this complexity stand to monetize a growing army of hundreds of millions. Isn’t
that potential worth the challenge?

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gaming
chapter 10

not a spectator
sport

gaming: not a spectator sport | 167


the shift

Key Chapter Highlights


The stereotype that the average gamer is a socially
isolated teen-aged boy is inaccurate. Gamers are
57% male and 43% female, and the advent of social
media gaming has greatly diversified the gaming
audience.

Gaming is a nearly $20 billion market.

Social gaming is rising in popularity as the lines


between gaming and social networking become
increasingly blurred.

Hard-core gamers have a high willingness to pay for


API bundles that support their gaming experience
and competitiveness. Casual gaming provides
significant marketing and advertising opportunities
for brands, including the ability to accrue points
through play as currency in online promotions.

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> Today, one out of every four entertainment dollars


is spent on games.142 Rabid, hardcore gamers bring big dollars. The movie Avatar
grossed $232 million its opening weekend. The game Call of Duty: Modern
Warfare 2 grossed $401 million the first day.

But increasingly, it’s not just hardcore gamers bringing in the money. The
assumption about gamers is that they are all pale, teen-aged boys living in their
parents’ basements and playing video games with their friends. In truth, gaming
has actually expanded beyond what people expect. Yes, teen-aged boys are big into
gaming. Gaming has, for some in that demographic, replaced TV watching as the
all-time entertainment pastime. However, yesterday’s teen-aged boys are today’s
grown Millennial and Gen X men who are still gaming and for whom video
games are a central part of family time. Women are gaming more than ever on the
Nintendo® Wii® and via social media. Younger kids of both sexes are gaming—
through consoles at home, their computers and, increasingly, on mobile phones.

At the Mobile Marketing Forum in New York in June 2010, Elizabeth Harz, senior vice
president for global media sales at gaming company Electronic Arts, delivered a keynote
address and shared some demographic information about the gaming community:

gaming: not a spectator sport | 169


the shift

Gamers skew slightly male: 57% male to 43% female


One-third of players are parents, and 81% of them have children
who are also gamers
Ages range across demographic groups, but are mainly 18–44

Ages % of gamers

12–17 7%

18–24 18%

25–34 24%

35–44 22%

45–54 13%

55–65 6%

Home video gaming gained widespread popularity in the United States with the
Atari 2600, introduced in 1977. Atari became synonymous with home video
games and sold 30 million units.143 It was overtaken long ago by gaming consoles
like Sega Genesis and the early Nintendo systems. By 2000, the US video game
market—portable and console hardware, software, and accessories—was nearly
$8 billion. At the end of 2009, it reached $19.66 billion, down 8% over 2008 in a
softening economy that saw people cutting back on discretionary spending. Still,
the industry had record-breaking sales in December, suggesting people put off their
purchases until the holiday season. The other uptick in the sector was a 6% increase
in revenue from portable hardware. That increase for portable gaming devices is
set against the largest decline of the year—home console hardware, down 13%.144

Growth in the gaming market has not only included increases in sales, but
new means of distribution—including online gaming. In 2009, 20% of games
were digitally downloaded and 54% of gamers reported that they played games
online. Consumer market research company The NPD Group, who conducted

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the survey, also found that online gamers’ purchasing habits remained steady
throughout the economic downturn. Mobile gaming is also taking hold,
according to analyst Anita Frazier:

Mobile gaming, for instance, has advanced to play a bigger


role and the iPhone, in particular, is attracting a lot of attention
given the dizzying array of game apps available for this device.
Social media networks have emerged as the hot venue for
online gaming, due to the huge number of subscribers these
are attracting. But still, it’s unclear which business models are
working in this space.145

New Competitors, New Platforms


As the gaming market moves forward, the balance of revenue between
hardware and software is bound to shift. The iPhone- and Android-
based devices are attracting developers, and as the number of mobile gaming
applications and the sophistication of smartphones grow, the market for
portable devices—let alone home consoles—faces serious threats. Apple has
been direct in its attack. At an event in September 2009, Apple SVP, Phil
Schiller, talked about how other portable players compare to the iPhone and
iPod Touch, putting up a slide that read:

“No multi-touch user interface


Games are expensive
No app store
No iPod”146

Many of the games in the App Store are under $10 versus $25–$40 for a portable
console game. Part of this difference is the result of different markets. Console
games typically appeal to more hardcore gamers who play development- and
graphic-intense games—like Call of Duty, The Sims and World of Warcraft. Much
of the App Store games are simpler and aimed at the casual gamer market—
think Words with Friends. While mobile gaming doesn’t replace the experience
of a home gaming system on a large-screen HDTV, the iPhone and iPod Touch

gaming: not a spectator sport | 171


the shift

certainly challenge the portable console gaming devices with their unique
interface, multipurpose functionality, and instant wireless access to over 21,000
games and counting. The iPod Touch is a key platform, not just the iPhone.
According to AdMob, 78% of iPod Touch users are under 25 and 65% of users
are under 17. The average age of an iPod Touch user is 23, and they download
and use more applications than users of the other platforms.147

iPhone iPod Touch Android

Average Age 37 23 35

% under 17 25 65 24

App downloads/month 8.8 12.1 8.7

Paid app downloads/


1.8 1.6 1.1
month

Min/day using apps 79 100 80

Source: AdMob Mobile Metrics, January 2010

In our chapter on video, we mentioned the speculation in early 2010 about the
next version of Apple TV. Many expected that it would be a small device like
an “iPhone without a screen” that offered living room access to media content
stored in the cloud as well as to the App Store. Some thought the platform might
include games, since Apple didn’t—and still doesn’t—have a play in the gaming
console business.148 The thought was that cloud computing would offer benefits
not only for online video, but also for gaming. One analyst wrote about the
“glaring opportunity” offered in such a scenario by gaming. The market exists
for new kinds of scaled-down devices that can serve as gaming consoles as well
as access devices for online video. With the use of cloud computing, upgrading a
computer wouldn’t mean possibly losing your games, and users could access their
gaming data from anywhere, on any device. The hardware will be less important.

At a video gaming conference in Tokyo in 2009, Hirokazu Hanmura, president


of the Japanese research firm Enterbrain, said software is the future of gaming.
“We are going to move away from a market where it’s the hardware that fights

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against each other. … We are going to be moving to an era when different software
stores fight against each other.”149

New Customers
The casual gaming market should not be overlooked. While serious gamers
make significant investments in hardware and accessories, the casual gamer keeps
things much simpler—and cheaper. Gaming companies—Sony, Nintendo,
and Microsoft—have focused primarily on the hardcore segment, often to the
exclusion of the gamer who doesn’t want to dedicate hours upon hours with
a headset and complex controller to reach the next level of a game. Nintendo
broke away somewhat with the introduction of the Wii in 2006. Wii provides
easier-to-learn games with a less complicated interface, but the graphic intensity,
complexity of development, and price tag for games are the same. Microsoft
comes at its competition with iPhone from within the smartphone arena. There
are games for Windows Mobile®, but Windows® phones are currently marketed as
more business-oriented. However, this doesn’t preclude Microsoft from getting
more serious about the mobile gaming space as they see the market potential.

What the App Store games—and Facebook—have taught gaming companies is


that there’s a large untapped market for games that may not command the same
$40 price, but they also require less money and effort to develop. At the Game
Developers Conference (GDC) in March 2010, the evolving emphasis was clear.
For the first time, there was a separate event just for the iPhone—the iPhone
Games Summit. One GDC participant, Simon Jeffrey of iPhone gamemaker
Ngmoco, said, “The sexy emergent part of gaming...is next-gen mobile, led by
the iPhone. The focus is on $250,000 games, rather than $25 million.”150 Jeffrey
may be biased since his company’s bread and butter is the iPhone, but the figures
he notes are telling. He went on to give a nod to the competition, noting that
Android should “emerge as a serious gaming platform” and Windows Mobile 7
“has wind in its sails.”

According to smartphone applications analytics group Flurry, Apple’s app


storefront has already emerged as a serious gaming platform. Its social gaming
inventory draws a daily audience of 19 million who spend more than 22 minutes

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the shift

per day with the applications. In terms of reach, that places the size of this
audience somewhere between NBC’s Sunday Night Football and ABC’s
Dancing with the Stars and only 4 million pairs of eyeballs shy of the top show in
American primetime television, Fox’s American Idol.151

Game Developer Research reports that the economic downturn led to layoffs in
the gaming industry, resulting in an uptick of independent gaming developers
and developers working for smaller companies. Development cost matters. And
since developers surveyed in the report listed ease of development and market
penetration as the key factors in deciding which platforms to use, creating games
for app stores would be appealing. Plus, any programmer can develop an App
Store game by buying the $99 developer kit and doing the work. Developers for
Nintendo and Microsoft Mobile 7 must be approved in advance. While the price
points and competition make it a competitive business, the ease of entry is still
very attractive.

The study also revealed that support for mobile more than doubled in 2009, up
to 25% from 12% in 2008. By comparison, 41% developed for console games.
Nearly 75% of those supporting mobile said they are targeting iPhone and iPod
Touch development—more than double those who said they support Nintendo
DS and Sony PSP. Over 70% of developers said they were developing games for
PC or Mac, including browser and social games.152

In the spring of 2009, Sony proclaimed that the iPhone market is a “separate”
business from the portable Sony PSP and no threat. Sony Senior Vice President
of Marketing, Peter Dille, followed up with this:

Consumers that want to carry a PSP are primarily gamers and I


think there’s a big difference in the types of games you can play
on a PSP versus an iPhone. The iPhone games and apps are
largely diversionary, whereas we’re a gaming company and we
make games for people who want to carry a gaming device and
play a game that offers a satisfying 20+ hours of gameplay. So
it’s really coming at the market with different perspectives... a
phone vs. a gaming machine.

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This declaration was either bluster or bluff and probably the latter. Just a few
months later, Sony introduced the PSP Minis, which one blogger described as
“a line of low-price, small-scale video games aimed at the upcoming PSP Go
handheld. The list of planned games, including Air Hockey, Bowling, and Pac-
Man Championship Edition, sound a lot like what you’d find in the iPhone’s App
Store.”153 Although Sony insists it isn’t in competition with smartphones, the
move clearly illustrates an intention to capture customers who have less than 20
hours to spend mastering a game.

In addition to having less time than the hardcore gamer, casual gamers are also
interested in less violent, more family-oriented games—a key target for the
Nintendo Wii. As a result, the Wii has become the dominant gaming platform
for women. President of Nintendo America, Reggie Fils-Aime, presented a
breakdown of console gaming in the United States in November 2009. There
are 45 million players of which 26% are female, just under 12 million. Of those
women, 80% are on the Nintendo Wii, 11% are on the Microsoft Xbox 360® and
9% are on the Sony PlayStation 3®.154

Social Gaming
Gamers are a social breed. In fact, Alcatel-Lucent focus group research reveals
that gamers are the most socially active of any of their Web 2.0 counterparts,
including social networkers. Gamers love their friends more than they hate their
enemies. For them, the experience is more than the thrill of gaming itself; it’s
about connecting with others who share the same passion.

When asked how gaming compares to social networking, our focus group
respondents were clear: there is no comparison. For them, social networking is
a more superficial view of relationships. Gaming is where true connections are
formed. That said, many in the group agreed that there is an intersection where
these two activities collide quite naturally.

In fact, our gamers perceived their avatars as an extension of their physical selves
when discussing certain network capabilities, such as profiling. For other focus

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group respondents, profiling pertains to divulging one’s personal preferences and


online habits in exchange for better targeting of advertisements and offers. But, for
gamers, profiling takes on a whole new meaning. For them, preferences are about
their avatars, not themselves. And, the next phase of social networking for these
gamers involves developing virtual relationships between their avatar and others.
You see, our gamer respondents represented the collision of physical and virtual
worlds, making it almost impossible to disassociate one from his virtual self.

This speaks to the popularity associated with social gaming—particularly via


Facebook. Social networking in gaming isn’t anything new. Ever since Internet access
was added to gaming consoles, gamers could play with and/or against their friends
and make new friends in the gaming world. This social gameplay was obviously
extended to PC gaming, culminating in massively multiplayer online (MMO)
games like the well-known World of Warcraft. World of Warcraft has over 12 million
active players and is the most popular MMO in the West. There are games with more
subscribers out of Asia that are not translated for the Western market.155

With the rapid growth of social networks, developers have moved to sites like
Facebook and MySpace to expand social gaming, which has had a dramatic
impact on the number of people gaming and has diversified the gaming audience.
Michael Dowling, CEO of Interpret, a new media research company, described
the phenomenon in his blog, SkipLogik. He talked about tracking gaming in a
variety of media every quarter for the past 3 years without much change in the
size of the gaming audience. Then came a 28% increase in late 2008, which his
researchers initially thought was an error.

After several late nights, much analysis, and the harried nerves
of our analysts, we determined the data was correct. Over
the following quarters, video gaming in the United States
held at those higher numbers. The Wii had been in the market
since December 2007, so we attributed some of that growth
to it. But, another interesting trend was emerging that was
slowly proving to be a major factor in expanding the gaming
audience—social networking. From Q3 of 2008 to Q3 of 2009,
the video gaming audience increased 28%; over the same time

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period, social networking grew by 56%.


Facebook has now become as important to gaming as other
casual gaming sites. Between 3rd and 4th quarter of 2009,
Facebook surpassed Yahoo! as the number one casual gaming
website among casual gamers.156

Again, as with the Wii, social gaming has high appeal with women. PopCap,
a maker of social games, did a survey to profile social gamers. The result? The
average social gamer in the United States is a 48-year-old woman.157

> Two-thirds of social gamers also play other video games, including both
casual and hardcore games.
> 39% of their time is devoted to social games, 31% to casual games, and
30% to hardcore games
> 52% access games on the computer, 22% on a console game system, 14%
on a handheld gaming device, 12% on mobile phones
> 36% play several times per day, 32% once a day, 28% 2–3 times per week,
and 4% once a week or less

Social gaming requires less time, no special equipment, and allows users to
connect socially with their friends within the context of the game. Friends
will water your virtual crops while you’re on real vacation or lend you money
to buy weapons. “With more than 80% of social gamers stating that playing
social games strengthens their relationship with friends, family and colleagues,
social gaming reinforces the core appeal of social networks,” said Robin Boyar of
Thinktank Research, commenting on the PopCap study.158

For many, it’s Facebook that reminds them it’s their friend’s birthday on Thursday
or tells them their cousin just got a new job or broke up with her boyfriend.
Within this virtual social context, a user can send virtual drinks, flowers, and
birthday cake to their friends. There’s no reason those virtual gifts couldn’t be real
money or coupons earned through playing games online, viewing advertising, or
just buying credits. In fact, in assessing the attractiveness of several new gaming
applications among 1,000 hard-core gamers in North America, the clear winner
involved rewarding gamers for virtual achievements with physical coupons and

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merchandise. Interestingly, the second most popular application combined


gaming with social networking, allowing gamers to represent themselves as their
avatars when connecting with others outside of the game experience. Indeed,
these two worlds are converging, as social gaming users spread their time across
different gaming media fairly evenly, opening up the opportunity to allow
them seamless integration of their activities, scores, etc. across platforms, and
enhancing their connection with their social network.

Virtual Crops, Virtual Enemies,


Virtual $5 Billion Market Cap
A winner in the social gaming explosion is Zynga—maker of FarmVille, Mafia
Wars, and the new FrontierVille games famously available via Facebook. Users
can also play the games via MySpace, Yahoo! and other sites, and Farmville
launched in the App Store at the end of June. Zynga has over 235 million users,
and financial analysts say the private company may haul in $500 million in sales
in 2010 and estimated its market cap at $5 billion in April.159 By comparison,
publicly traded Entertainment Arts (EA)—maker of monster successes
like Madden NFL, The Sims, and Rock Band—had an actual market cap of
$4.9 billion as of June 2010.

Farmville won the first “Best New Social/Online Game” Choice Award at the
GDC in April. In an interview at the conference, the game’s general manager,
Bill Mooney, made a plug for Zynga as a developer-friendly environment:

I want indie developers to know that this is a good space to


make games and get visibility. If you develop a great game,
people will find it and play it. You don’t have to wait years and
years to make it happen. People loved FarmVille and were
playing it before we spent any money on advertising.160

High Dollar, Not High Maintenance


Still, there are the hardcore gamers who show a strong willingness to pay for new
services to enhance their gaming experience and gain a competitive advantage. Our
own research showed that gaming is one of the most lucrative opportunities in the

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Web 2.0 world. We tested several new gaming services with active gamers, who self-
identified as playing at least two massively multiplayer online role-playing games
(MMORPGs) for at least 7 hours per week. Each service combined gaming with
a varying mashup of network APIs—presence, storage, and QoS. We asked about
user preferences as well as how much they would pay for the various services. The
outcome revealed gamers’ favorite APIs and their relative willingness to pay.

Compared to our other tested groups—parents, social networkers, and online


video enthusiasts—gamers had the highest take rate for new services and
delivered the highest average revenue per potential customer by several orders
of magnitude. The data isn’t surprising, considering other audiences are not
accustomed to paying for online video or social networks. Whatever new
services they’ll pay for, it’s starting from a baseline service that they expect to
get for free. Hardcore gamers, on the other hand, are quite used to investing
significant money for their pastime, from the one-time cost of a console game to
the ongoing monthly subscription fee for an online game.

How this data would translate for casual gamers is unclear. Many games in the
App Store and on social networking sites are free. Would they follow the pattern
of online video and social networking and have a reduced willingness to pay?
Possibly. There’s the “freemium” market where gamers play for free and then pay to
have additional advantages within a game, which may appeal to competitive casual
gamers. One other potential opportunity to head off reduced willingness to pay is
to take advantage of the mashup that gamers liked the most—game-play rewards.
A provider of gaming services could offer brands the opportunity to promote
products via coupons and credits for online purchases. In application stores,
branded games that tie into larger marketing campaigns for music, movies, food
service, etc. are another option. Think: a new kid’s movie that has merchandising
tie-ins can offer a free game where kids can play to earn sneak previews of additional
content or credits toward online purchases. A viral marketing campaign might also
give them extra benefits for inviting friends to download the game.

Another opportunity lies in building services using the clear favorite API for
gamers: presence. Given the increasingly social nature of gaming, it makes sense
that gamers would value an asset that helps them know when their friends are

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available and connect in real time. The greatest opportunities are in blending
all of a provider’s assets to enhance the increasingly social and mobile aspects of
gaming, such as allowing users access to their services from anywhere through
network- or cloud-based services. Gamers, like the other Web 2.0 consumer
groups we tested, are willing to pay more for more robust services. In this case,
bundling multiple APIs together into one massive mashup, or service definition,
increases willingness to pay as much as 34%. The more powerful the service, the
greater a gamer’s willingness to pay.

For gamers, high-dollar (in the form of a much higher willingness to pay) does
not translate to high-maintenance for a network provider. Specifically, when
asked whom they would be most likely to initially contact for assistance in the
event their favorite gaming application was not working, far fewer gamers were
likely to turn to their service provider as their first response. Specifically, only
35% of gamers were likely to pursue their network operator, compared with 63%
of parents, 48% of online video enthusiasts, and 44% of social networkers. The
support channels gamers prefer reflect their online sophistication, with gamers
much more likely to engage in online forums than their Web 2.0 counterparts.

Putting it All Together


If you are a provider or developer and are not in the game of servicing gamers,
you may want to rethink your strategy. Gamers:

> Have a much higher willingness to pay for services enhanced with
network-based capabilities, such as presence, QoS, and storage (compared
with social networkers, online video enthusiasts, and connected parents)
> Are more likely to pursue other channels for support in the event their
favorite application is not working, making them a lower-maintenance
segment to service (compared with the groups mentioned above)
> Have no clear preference for a billing model (such as a monthly or per-
use fee for an application) but do have a clear aversion to one-time fees.
That is, based on take rates, service providers are better served avoiding
one-time fees when targeting the gamer segment as potential revenue is
sub-optimized with this approach.

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> Are surprisingly tolerant of service definitions with a high frequency of


advertising impressions. Gamers, like the other audiences tested, were
equally likely to take a service with up to three times the number of
advertising impressions. Providers should not take this one too far. First,
the advertising must be unobtrusive to the gaming experience. And,
second, we are not suggesting that tolerance for advertising translates
to purchase intent. However, given gamers are a high-dollar segment
who are also at least tolerant to heavy ad rotation bodes well for those
servicing them.
> Are more likely to trust their service provider over an application
developer when sharing sensitive contextual information about
themselves, including preferences, presence, and location

Gamers have grown up from the Atari generation of the 1980s. This is no longer
an activity for the socially isolated. In fact, gamers are among the most socially
connected 2.0 enthusiasts we examined in our research. They have a passion
for their pastime and a willingness to pay for their addiction. They are also
more sophisticated in caring for their support needs. Finally, their acceptance
of advertising that does not disrupt the gaming experience creates yet another
revenue stream to tap into this lucrative market. If you’re not servicing gamers,
perhaps it’s time to get off the sidelines.

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part 4

the
enterprise
2.0 imperative
the shift

184 | chapter 10
the shift

small
chapter 11

business
The American dream

small business: the american dream | 185


the shift

Key Chapter Highlights


Small businesses represent the growth engine of our
economy. Yet, they find themselves in an unenviable
position—sandwiched between the behemoth
markets of large enterprises and consumers. As
such, providers attempting to address this market
have found its fragmentation challenging.

Given the recessionary times, multiple secondary


sources point to this segment’s need to deliver
revenue growth. Accordingly, applications that
address this challenge will find a receptive market.

Simplicity is key for this audience. Providers should


avoid over-engineering services with complex
functionality and billing options or face sub-optimal
revenues as a result.

Small businesses crave security, placing network-


based security options on par with more expensive,
comprehensive support alternatives.

This market is surprisingly receptive to advertising,


offering an opportunity for advertising-subsidized
business models.

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> Entrepreneurship is the heartbeat of the American


dream. Perhaps that helps explain why Americans are in love with small
business. Don’t believe us? Consider the following: A 2010 Gallup Poll found
that “small business” received the most favorable reaction from respondents
when compared with six other terms, including “capitalism,” “socialism,” and
“the federal government.” In fact, 95% of Americans polled indicated a positive
image associated with the term (interestingly, “entrepreneurs” also fared well,
with 84% of respondents reporting a positive reaction).161

A separate poll by the Pew Research Center conducted among 2,500 American
adults in March of 2010 found that small businesses outranked the media,
corporations, and government in their contribution to society. More than 70%
of respondents said small businesses positively affect society. Surprisingly, this
was the highest figure of any entity assessed, even churches and synagogues,
which earned favorable ratings from only 63% of respondents in comparison.162

Finally, a 2010 survey released by WebVisible, an online marketing services


provider that works primarily with small and medium-sized companies, found
that 80% of respondents regularly patronize small businesses over larger chains.
Respondents cited their top three motivations as community support, travel

small business: the american dream | 187


the shift

convenience, and personalized attention. In contrast, only 17% of those surveyed


stated they do not choose small business over larger chains.163 This final study
would corroborate that respondents’ positive beliefs about small businesses are
translating to increased patronage of these establishments.

Indeed, these surveys support that small business is no small wonder, surpassing
Uncle Sam, big business, and even organized religion in its societal impact and favor.
Maybe that’s because small businesses represent more than 99% of all US employers
and have created 64% of all new jobs in the past 15 years according to the US Small
Business Administration, which defines a small business as one employing 250 or
fewer employees. (In Europe, that job creation figure has been as high as 80% in
recent years).164 In 2010, Intuit’s Small Business Employment Index reported that
small businesses in the United States generated 49,000 new jobs, up 3% over 2009.165
Indeed, small business is the American dream, with 61% of Americans indicating
they would prefer self-employment to working for someone else, a higher share than
in 25 European countries, according to the EU Flash Eurobarometer.166

And, lest you believe that the impact of small business is relegated exclusively
within the confines of the US border, the US Commercial Service, which helps US
companies expand internationally, reported that 23% of its clients exported for the
first time, entered a new market, or increased their international penetration in 2009.
That represents a 3% increase over 2008.167 In fact, confidence in small business is
even stronger overseas, with 66% of European CEOs saying small business will
be the primary source of job creation in their countries through 2011 (compared
with 40% of US CEOs), according to a recent NYSE Euronext CEO Report. For
CEOs in the rest of the world, the figure was 44%. In all cases, CEOs across the
globe predicted more job growth from small business than from the government,
public companies, or new ventures in their countries.168 Perhaps these bullish
estimates reflect the point that small business is a pivotal growth element in any
economy. In fact, for all the optimism that Americans have toward small business,
it may surprise you to learn that small business currently accounts for less of the
total economic activity in the United States than in many European nations. In
fact, the Organization for Economic Cooperation and Development (OECD)
reported that in 2008, the self-employment rate in 25 European countries was
higher than in the United States and was lower only in Luxembourg.169

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Small business is not small potatoes in the telecommunications world either. Compass
Intelligence estimates Information/Communications Technology (ICT) spend of
businesses with 5–99 employees to reach nearly $280 billion by 2012.170 Despite the
opportunities, this audience has been a challenge to providers attempting to cash in.
Indeed, small businesses suffer the proverbial middle child syndrome, sandwiched
between the behemoths of mass-market consumers on one end and large corporations
on the other. There are too many of them to be treated as a custom market with
the same costly go-to-market tactics, such as face-to-face and dedicated account
management options, typically offered to large enterprises. And, they are too complex
in their buying needs to be treated with the same one-size-fits-all packaging and media
options, typically more common in mass consumer markets.

Given their unique buying behaviors, sophisticated communications needs, and


significant growth potential, small businesses are perhaps the most lucrative
segment of the user market where application enablement makes the most
sense. With hundreds of thousands—if not millions—of developers creating
new products and services for these entrepreneurs, service providers challenged
by the fragmentation of this market have an alternative to the more onerous
do-it-yourself service creation options. And, since research demonstrates that
commercial developers have an appetite and willingness to pay for network
capabilities, the question now turns to one of attraction among these small
business entrepreneurs. Do small businesses perceive value in network-based
intelligence when said capabilities are inserted into new or existing services?
Alcatel-Lucent sought to answer this question by canvassing over 800 small and
medium-sized businesses in the United States—all with 100 employees or less.

It’s the Economy, Stupid


It’s ironic that such a politically incorrect battle cry actually originated in
politics itself. Yet, when the Clinton Administration popularized this slogan
in its campaign defeat against George H. W. Bush, few could have imagined
this politically incorrect statement would have seemingly timeless relevance. As
recessionary times once again abound, the economy itself weighs heaviest on
small and medium-sized business owners, making this mantra most appropriate
for this segment. Confidence among US small businesses rose in May of 2010 to

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the shift

the highest levels in 8 months according to the National Federation of Independent


Business, signaling a more upbeat attitude about the economy 6 months from now.
Despite this uptick, small businesses still lag larger companies in their optimism
for the future. The study found that 30% of respondents cited “poor sales” as
their top business concern, up a point from April.171

In yet another study, Travelers polled 101 small business owners in May of
2010 at the US Chamber of Commerce America’s Small Business Summit in
Washington, DC. Respondents were asked to rank their top priorities from a
list of seven, including managing cash flow, attracting financing, and acquiring
talent. Interestingly, marketing and sales surfaced as the top priority among the
seven, outperforming critical financial drivers in the race.172 As this evidence
supports, current recessionary times place a priority on growing topline revenues
among these small business owners.

Our data found the same. We asked respondents to indicate their top three
factors that drive decision-making from a list of ten possibilities. Creating
revenue streams and increasing customer satisfaction scored in the top three,
cited by 44% and 37% of respondents, respectively. In fact, only reducing overall
operational expenses scored better, selected by 50% of respondents.

Keep it Simple, Stupid


Another popular, if not politically incorrect, saying that was first coined by a
lead engineer at Lockheed, pertains to designing for simplicity. While it can be
tempting to over-engineer a product or service, doing so creates consequences in
customer acquisition and service. Look no further than the decision makers in
our study for evidence to support this credo.

Up until now, we have largely praised the concept of bundling as it pertains to


creating new functionality in services. As a reminder:

> Consumers were willing to spend approximately 25%–35% more for a


service with three capabilities operating simultaneously when compared
against a service using any one capability on its own.

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> Commercial developers were willing to spend up to twice as much for


bundles of APIs when compared with the revenue potential of each API
sold independently.
> Enterprise IT developers were willing to spend up to three times as much
for bundles of APIs when compared with the revenue potential of each
API sold separately.

For small and medium-sized businesses, the bundling opportunity takes a


different twist. Not only is this audience less attracted to bundling when
compared with the others listed above, for these entrepreneurs, the inclusion of
additional network capabilities increases willingness to pay—but only up to a
point in which revenue is maximized. Let’s take each finding in turn.

First, though this audience will increase its willingness to pay for bundled
network capabilities, their appetite is less than that of their survey counterparts.
Specifically, services consisting of bundled network capabilities garner about
5%–20% more revenue than those represented by single functionality. This
range is significantly lower than that seen from the other survey groups above.

Second, bundling represents increased revenue potential but there is a law of diminishing
returns at play. After this revenue-maximizing point, the inclusion of more features or
functionality begins to decrease willingness to pay in some cases. It’s almost as if this
audience is unafraid of saying when enough is enough. Too many features and too
much functionality begin to erode value of the service. Inserting more complication in
the system sub-optimizes willingness to pay. For this audience, the addition of weaker
performing APIs (as measured by functionality within a service definition) brings
down the value of the overall bundle. For this audience, less can be more. Hence, they
are a visible representation of the now popularized tenet, “Keep it Simple, Stupid.”

Size Does Matter


Small and medium-sized businesses are as unique as their owners. It comes as
no surprise that differences abound in this highly fragmented market, even
when comparing a basic firm characteristic—the number of employees. For this
critical parameter, two findings in particular are worth mention.

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First, when it comes to interest and willingness to pay, the size of the firm has
something to do with how network features and functionality are evaluated. For
these network capabilities, smaller firms (those with 19 or fewer employees) tend
to have lower willingness to pay than their mid-sized counterparts (those with
20–99 employees)—when compared on a revenue-per-employee basis. While
revenue potential may differ, the attraction to particular network capabilities is
similar, regardless of firm size. That is, small and medium-sized enterprises were
equally drawn to QoS capabilities (including the abilities to temporarily boost
bandwidth or diagnose how an application is performing across the network)
and presence APIs (including the abilities to click to connect with or send
messages to multiple individuals based on the devices they are currently using).

This first point is true when considering the stickiness, or retention factor,
of a service. In a finite market, churn is the enemy. For every subscriber that
deactivates service, a provider may spend up to six times the expense to attract
a new customer to take the former’s place. It’s no wonder that retention and
loyalty are critical measures in this space. Again, we find that both increase with
the size of the organization. In short, offering advanced network capabilities
generates incremental revenues for providers by attracting new customers and
retaining existing ones, and both opportunities are positively correlated as the
employee size of the customer’s enterprise increases.

Second, when it comes to how these organizations perceive sensitive profiling


information about employees, size matters once again. When asked if their
organization currently has policies capable of monitoring employee behavior,
including content and media consumption, bandwidth consumed, and time spent
on the network, 32% of medium-sized organizations (those with 20–99 employees)
responded affirmatively. In contrast, only 10% of very small (those with 1–5
employees) and 20% of small (those with 6–19 employees) organizations indicated
the same. For a service provider looking to incorporate some of the more sensitive
contextual APIs into their service definitions—especially presence-based capabilities,
which scored particularly well—it must first address this employee policy gap. A
provider may well find itself in a position where small enterprises gravitate toward
APIs without the employee policies in place to authorize said functionality. This gap
must be recognized, if not outright addressed, in a provider’s go-to-market approach.

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Security Rivals Support


In matters where differences between these enterprises were less pronounced, our
old friend security once again sits in a prominent position at this table. Symantec
recently released its Security Threat Report volume XV, which highlighted trends in
cybercrime in 2009. Among them was an increase in the number of targeted threats
focused on enterprises. The report found that attackers were using information
made available on social networking sites to launch direct attacks at particular firms
or company individuals.173 Intersect this cybercrime trend with the rise of social
media in the small enterprise sector, and the opportunities are fraught with disaster.

We once again put security to the test among this audience. The findings were a
bit surprising. When pitting security (as expressed by services being offered over
a secure network) against five competing value-added options, it rivaled the most
comprehensive support package in attracting respondents’ interest and increasing
their willingness to pay. This point bears repeating. In a fragmented market
where dedicated account support is all but non-existent, the mere presence of a
service traversing a secure network alone rivaled a very expensive support package
inclusive of localized account management and a live IT help desk. If this point
does not put the security threat in perspective, we’re not sure what would.

Won’t Be Fooled
Finally, these entrepreneurs demonstrate what makes them savvy businesspeople
in the first place: they are open to a good deal. And, in a market where advertising
can subsidize the cost of a service, these decision makers are eager to trade their
attention (and even that of their employees) for money back in their wallet. We
asked respondents how likely they would be to subscribe to a service that was
discounted over a period of time in exchange for a set number of advertisement
exposures to their employee base. Among the findings were the following:

> Indefinite discounts of 20% off the cost of a service attracted more than enough
incremental respondents to justify the cost of the discount. In this case, a
provider can neutralize the discounted revenue per respondent by making it up
in volume with incremental demand. Note that this analysis does not even factor
in the incremental advertising dollars afforded a provider under this approach.

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> This was a case where size did not matter. All firms in the sample were
amenable to advertising as an option to subsidize their communications costs.
> In cases of more attractive ad formats tested (such as video, for example),
the 20% discount in exchange for advertising could be as little as 6 months,
showing that preferential ad formats require less of a discount period to
attract buyers.

The evidence suggests that advertising is an area of interest among these


respondents—one that will also result in incremental revenues for providers.
This audience does not suffer fools gladly. They are willing to sacrifice their
attention in exchange for a compelling discount. And, given the economic
growth this audience is expected to stimulate over the next few years, advertisers
would be wise to take notice.

Putting It All Together


Small and medium-sized businesses are not without their challenges. They are
too many in number to be treated with customization. They are too complex
in their needs to be handled with a one-size-fits-all approach. They are savvy
entrepreneurs looking for ways to grow their topline despite a recession. And, if
consumer and CEO confidence levels are any indication, our economy directly
depends on their success.

The tenets for providers and developers looking to tap into this space are
straightforward:

> These entrepreneurs see value in network-based capabilities when


inserted in service definitions. Willingness to pay and stay both exist
and are positively correlated to the size of the firm, which is a good news
story for providers and developers alike.
> Keep it Simple, Stupid. Yes, this is a very direct mantra but it speaks
loudly for this audience. Providers and developers should avoid over-
engineering services or face sub-optimized revenues as a result. Likewise,
they should keep billing options simple to preclude any surprises. When
we tested various billing options among this audience, monthly billing

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far exceeded any per-use alternatives in maximizing a provider’s revenue


potential. Simplicity is key when dealing with this audience.
> Providers and developers should recognize the limitations of contextual
APIs as they pertain to company policies that allow or prohibit their use.
The presence of employee policies to authorize such services is low across
the board among these firms, but particularly deficient among very small
enterprises (those with five or fewer employees). The challenge is that
this segment is equally attracted to these capabilities, particularly those
in the presence category, as their larger counterparts. Service providers
must acknowledge if not outright address this gap in their go-to-market
attempts. Otherwise, the pent-up demand for such services will be
thwarted by insufficient privacy policies inherent in these organizations.
> Security is a must. It alone rivaled the most comprehensive (and
expensive) support option. The confluence of cybercrime trends, social
media adoption among this audience, and its lack of dedicated IT
support when compared with that of its large enterprise brethren make
this segment ripe for attack. Service providers who understand this
threat and offer network-based security as a table stake stand to gain.
> Advertising should not be ignored. What this segment lacks in technical
prowess is more than made up for in business savvy. They are open to
new advertising models—so much so, that service providers can make
up any discounted revenues with incremental volume. This doesn’t even
cover the upside associated with the advertising itself.

These arguments point to an interesting and practical course for service providers.
A market where fragmentation was once their most significant challenge can
now be their biggest opportunity in an application-enabled world. With small
and medium-sized businesses ready and willing to participate, let’s turn our
attention to another hot topic in today’s headlines: the healthcare segment.

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health-
chapter 12

care
high stakes
higher rewards

healthcare: high stakes, higher rewards | 197


the shift

Key Chapter Highlights


The recent healthcare reform movement represents
significant opportunity for ICT providers in this
market.

Meaningful use requirements associated with


electronic health records place unprecedented
demands upon secure and reliable networks.

Geographically challenged facilities are turning to


remote healthcare alternatives, such as eICUs, to
attract talent and optimize patient care.

Remote healthcare monitoring solutions place the


patient at the center of his care and allow providers
and developers an emerging growth opportunity.

Given these trends, healthcare decision makers are


the most enthusiastic of all vertical segments tested
as it pertains to their interest in network-enabled
applications.

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> Browse any major news publication these days and


you’re bound to find ample content surrounding the current healthcare
debate. The stakes are major: Healthcare reform to cover nearly all legal
American citizens at a cost of roughly $1 trillion over the next 10 years.
And, while this bill will be funded through multiple cost-reduction or
revenue-generating options, the impact of IT and communications on this
critical sector has never been more significant. That’s because ICT stands
to revolutionize the way patient care is administered, the methods used to
access medical expertise, and the means by which chronic disease is prevented
and managed.

While we can wax poetic about the opportunities afforded through


such transformation, perhaps the argument would be more credible
coming from those within the healthcare industry. According to a recent
PricewaterhouseCoopers (PwC) study, 90% of US healthcare leaders and
84% of global healthcare leaders indicated that information technology
will be a “key factor” for transforming healthcare today and in the decade
to come.174 The survey, conducted in April, 2010, polled 590 leaders of
health plans, providers, employers, government, physician groups, and
pharmaceutical and life science firms in 20 countries.

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Whether ICT enables preventative care, allows clinicians to spend more time
with patients, or bridges geographic boundaries separating medical experts, its
significance in this game has never been greater. As the United States seeks to
insure tens of millions more Americans without breaking the bank in the process,
efficiencies in this sector take on new meaning. And, as we will prove, ICT has
an important role to play in this story. Healthcare is extremely complex. But, its
passion is straightforward. Caregivers enter the field with the noble intentions of
curing the sick and saving lives. The Hippocratic Oath becomes the compass by
which new technologies and enablers may be measured. With patient care as the
desired outcome, access to funding and talent are imperatives. Let’s examine the
role of ICT in transforming this critical field—all while supporting its noblest
of intentions. Later, we will cover how healthcare decision makers evaluated
Application Enablement in an environment where seconds can literally mean
the difference between life and death.

Funding—A Whole New “Meaning”


Nearly three-quarters of respondents to the 21st Annual Healthcare Information and
Management Systems Society (HIMSS) Leadership Survey reported they expect their
IT operating budgets to increase in 2010—that’s up from 55% of respondents who
indicated the same in 2009. Nearly half who predicted their budgets would increase
cited meaningful use as a driver. Further, when asked to identify their single IT priority
over the next 2 years, 42% of respondents reported meeting meaningful use criteria.175

“Meaningful use.” The seemingly innocuous phrase stepped into the limelight
shortly after President Obama—2 weeks prior to taking his elected position
in January 2009—prophetically proclaimed, “We will make the immediate
investments necessary to ensure that within 5 years, all of America’s medical records
are computerized.” Shortly thereafter, the American Recovery and Reinvestment
Act was approved, and with it some $36 billion in funding to make this ambition
a reality. True to a classic behavioral modification model, the plan uses a carrot
and stick approach. Financial incentives are available for those practitioners and
sites jumping on board quickly. Likewise, those who have failed to adhere by
2015 will find their Medicare reimbursement payments adversely affected. The
set of criteria to measure compliance is extensive. To demonstrate “meaningful

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use” of electronic health records, doctors and hospitals must meet 15 and 14 core
objectives, respectively. Among some of these, doctors would need to provide
patients with an electronic copy of their health information on request. Doctors
and hospitals would need to demonstrate that they can “electronically exchange
key clinical information.” And, since dollars and cents are at play, this new standard
of electronic health certainly has the attention of the medical community.

At the heart of meaningful use is the electronic health record (EHR). Today,
most hospitals and healthcare practitioners wade through a sea of paperwork,
much of which must be maintained and secured for several years under current
regulations. A patient with multiple practitioners and a lifelong history of
medical visits often finds himself the subject of fragmented recordkeeping.
Caregivers requiring the efficient exchange of patient information—particularly
for complex cases—must frequently rely upon archaic search and retrieval
capabilities inherent in paper-based systems. For example, a recent study by
Jackson Healthcare across nearly 2,500 nurses found that only one-quarter of
a 12-hour shift is spent on patient care, with the vast majority of the nurse’s
remaining time being consumed by paperwork activities.176 Digitizing patient
information and making it accessible across clinician and hospital boundaries
addresses this challenge and optimizes patient care.

To be fair, moving to an EHR approach is not without its challenges, notably


the onerous transition required to repopulate paper-based notations into an
electronic record and the user intervention necessary to do so. However, for early
adopters of EHR systems, initial results are promising. Long before meaningful
use was ever in the headlines, leaders at Sentara Health System envisioned a
brave new world of electronic patient records. As one of the earliest adopters
of an EHR system, results across six hospitals in 2009 were nothing short of
extraordinary, as Sentara:

> Achieved $9.3 million in benefits associated with reduced lengths of stay
and decreased adverse drug effects
> Attained $9.4 million in savings associated with improved retention
of nurses and lower overtime and contractor costs (key accelerants to
nursing turnover)

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the shift

> Increased the number of outpatient procedures at a dollar benefit of


$4.4 million—essentially by improving efficiencies and doing more with less
> Avoided more than 88,000 medication errors

The bottom line? Sentara exceeded its projected $17 million return on investment
by $12 million in 2009.177 Not too shabby for a system that also optimized
patient care in the process. In fact, analysts at Thomson Reuters recently pegged
the estimated annual savings associated with such system improvements to be
$50 billion across the industry, simply due to avoidance of duplicated tests and
inappropriate treatments made possible by electronic records.178

With significant time, resources and money riding on healthcare reform, the
pivotal aspect of electronic patient records has profound impact on network
providers. If we have been impressed by how the digitization of content, such
as music and movies, has changed how we consume entertainment, imagine the
tsunamic effects of transforming our healthcare identities in the same way. Not
surprisingly, the key concern among both patients and practitioners rests in the
security of such sacred content. A study by Harris Interactive found that over 70%
of consumers have “significant” concerns about the security of electronic health
records.179 Similarly, another study by the California HealthCare Foundation
found that two out of three Americans are concerned about the privacy of their
health information.180

The concerns are warranted. Take the following:

> According to the 2010 HIMSS Analytics Report: Security of Patient


Data, critical gaps were found in data security, with hospitals dedicating
more time to breach response than to breach prevention. The number
of healthcare organizations that reported a breach increased to 19%
of respondents—up from 13% the previous year. These organizations
tend to underestimate the financial burden of such breaches, despite
regulatory penalties that can reach up to $1.5 million alone.181
> Per the HIMSS Leadership Survey, 34% of respondents indicated an
internal breach of security was their top concern, and nearly one-quarter
said their organization had a security breach in the past year.182

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> SecureWorks, an information security service which protects over eighty


healthcare companies in the United States, reported that attacks against
these clients doubled in the fourth quarter of 2009.183

Despite these security concerns, current reform investment initiatives will


support the adoption of electronic health records within the next few years.
Opportunistic service providers and developers will see this revolution as the
next step-function in growth for this critical sector. And, network functionality,
such as security, QoS and contextual capabilities may prove instrumental in
accelerating this change.

Caregiver—Bridging the Digital Divide


As the healthcare landscape becomes even more fiercely competitive, access
to talent is a key weapon in the battle. Patients select doctors. Doctors select
facilities. In this circle of life, those able to attract the best clinicians can use these
experts as the proverbial Pied Pipers in the equation. And, technology is fast
becoming an attractor, if not equalizer, in this race for the best.

Let’s take a couple of examples. We’ve discussed how EHR will remain at
the center of incentives and penalties for healthcare providers over the next
several years. However, it is also a key attractor for technologically advanced
physicians. According to a recent study by Epocrates, 84% of medical students
had experience with electronic medical records during their clinical rotations,
and 90% indicated that such functionality would be an important factor in
choosing where to practice medicine.184

And, if digitization of patient content serves to attract a new breed of


technologically advanced practitioner, the underlying networks transporting
these bits and bytes are the great equalizer for geographically disadvantaged
facilities. Among the latest trends for rural hospitals is the rise of the eICU.
Unfortunately, you have likely been affected by an ICU incident—either
directly or indirectly—and therefore may be all too familiar with typical ICU
care. The traditional approach of caring for an ICU patient involves doctors
making rounds at prescribed intervals with caregivers monitoring patient

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the shift

activity the rest of the time. The challenge is apparent for a large hospital in an
urban market—limited specialists to attend to multiple critical care patients.
Imagine how much more the problem is exacerbated in rural America, where
access to specialists is even scarcer.

Approximately 250 hospitals in the United States have turned to the eICU
as one remedy to a complex problem. By remotely connecting specialists
with patients through instant multimedia capabilities (including real-
time videoconferencing and collaboration functionality at the patient’s
bedside), these geographically disadvantaged institutions are tapping
into a breed of technologically sophisticated specialists. And, the benefits
surpass talent acquisition. Officials from Union Hospital in Clinton,
Indiana report that the program has resulted in a decreased patient stay of
26%, allowing the facility to admit 18% more ICU cases. 185 The Leapfrog
Group, a consortium of large employers, estimates 54,000 people a year
could be saved if every US ICU case were co-managed by a specialist—
an impossible feat without technology due to the scarcity of specialists
available. As a case in point, we’ve already mentioned Sentara as an early
adopter of EHR. Not surprisingly, this innovator was also among the first
to adopt an eICU system. Based on death rates before and after the system
was introduced, the pioneer estimates that its eICU has saved nearly 500
patients who would have died in traditional care—all while decreasing the
cost per ICU case by nearly $3000, or 25%. 186

Finally, if networks bridge the distance between talent and facility, devices
level the playing field for a new wave of mobility and computing. We
discussed the commercial success of the iPad in an earlier chapter, but the
potential impact of this device and others like it stands to catalyze this
industry forward into a brave new mobile world. As an example, Kaweah
Delta Health Care District in California plans to buy more than 100 iPads
in the next couple of months. Beyond the mobility the device affords
(especially critical given the movement to EHR), the facility also estimates
cost-saving benefits. Its emergency department can substitute one Computer
on Wheels (COW) at $7,500 for three iPads costing $1,500—all without
compromising functionality or patient care.187

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Patient—From Passivist to Partner


It’s hard to imagine life before the Internet. At one time not so far in the distant
past, patients lacked the wealth of information now readily available through a
few mouse clicks on virtually any identifiable condition. Information empowers.
And, the Internet has done wonders in creating a new breed of educated and
empowered patients.

While the Internet’s impact has been impressive on its own, the same networks
that connect patients to information can further redefine the landscape of
preventative care. If the Internet connects individuals to sources, the next wave
of innovation links patients to caregivers. We are not simply speaking of Web
2.0 tools akin to social media, though these have certainly facilitated a new
doctor-patient relationship. This concept goes far beyond communication. We
are referring to ICT as a critical enabler in the ongoing management of chronic
diseases. If the Internet evolved the patient from passivist to participant in
managing health, this new era promotes the patient to partner.

Take home monitoring devices as one example. With healthcare savings derived
from a greater focus on patient involvement in care, placing the individual as an active
partner—as opposed to a passive bystander—of treatment, imposes a new level of
accountability with measurable results. A study conducted by Kaiser Permanente
Colorado, the American Heart Association, and Microsoft put this theory to the
test among 348 patients divided into one of two groups: home monitoring or usual
care. The former group received a blood pressure device with a USB connection
that allowed users to transmit regular readings to a secure network server. Clinical
pharmacists were then able to access these results and consult with these patients on
medicinal adjustments. The control group had no personal monitoring capabilities
available. After 6 months, 58% of patients with the monitoring device had lowered
their blood pressure, compared with 38% in the control group.188 Though further
study is required, the preliminary results are an encouraging indicator of the ICT
potential in placing the patient at the center of care.

And, if extending patient care unobtrusively into a home environment changes the
landscape once again, the EHR puts the patient in the driver’s seat. With boundary-
less collaboration, consultation, and communication between physicians, patients,

healthcare: high stakes, higher rewards | 205


the shift

specialists, and clinicians, the possibilities in this space are equally boundless. In
fact, according to the previously mentioned survey by the California HealthCare
Foundation, consumers engage more in their own healthcare when they have
access to their personal health record.189 That is, consumers with online access
to their health information pay more attention to their health. Once again,
underlying networks are a key enabler to this powerful end.

Application Enablement in the Healthcare


Environment
The expected transformation to our healthcare environment will make history in
the next few years. But, how does Application Enablement fit into this story, if at
all? Alcatel-Lucent canvassed 300 healthcare decision makers to determine how
capabilities within the network, such as quality of service, security, and contextual
functionalities, may serve to accelerate this transformation. Among the findings:

> When asked to evaluate over a dozen new ICT service definitions,
decision makers favored those that optimized clinician workflows or
facilitated preventative medicine.
- In an industry where seconds matter, it comes as no
surprise that one of the most valued applications, based on
respondents’ willingness to pay, involved the seamless shifting of
communication from various modes (for example, escalating from
a voice to video call in one session) in a collaborative environment.
- Given all of the discussion surrounding EHR and the role of the
network in facilitating the transport of such content across devices
and individuals, another top performing application incorporated
QoS optimizers during periods of network congestion. (For the
non-technophiles in the audience, think of this as having a smart
network that can detect when more bandwidth is needed and can
temporarily give you a boost when transmitting large files.)
- Finally, given the rise of home monitoring, the capabilities
afforded through an unobtrusive network medical monitoring
device also garnered high willingness to pay among respondents.
Interestingly, in a separate module of our research aimed at

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connected parents, respondents also placed a remote health


monitoring solution among their top favorites of next-generation
services. Not surprising when you consider the emerging health
challenges facing Baby Boomers as discussed in that chapter.

> When looking at which network capabilities had the most profound impact
on influencing a respondent’s willingness to pay for a particular service, the
results corroborate the challenges faced by these decision makers:
- Presence capabilities, such as being able to seamlessly and
automatically click to connect to a clinician based on the most
accessible device, scored particularly well in this time-crunched
environment.
- Location capabilities, such as being able to physically locate the
nearest clinician to a patient, also performed well. In fact, the
healthcare segment is unique when compared to all others in that
it perceives location characteristics as more attractive and with a
higher willingness to pay than its vertical counterparts.
- Advanced security options, such as biometric identification, also
scored well in terms of willingness to pay.
- Storage and QoS capabilities that provide for the transmission
of electronic patient records to any device, and optimized for
delivery across the network, received particularly high marks from
respondents in terms of both interest and willingness to pay.

> In terms of security, respondents indicated higher take rates for


services noted as traversing secure networks. With the earlier examples
surrounding security breaches and mounting concern among both
patients and practitioners, this point is validated through our study.

> Healthcare decision makers are among the most enthusiastic of all
vertical segments tested. One in five healthcare decision makers would
place a very high priority in obtaining the applications tested, compared
with one in six across all segments.

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the shift

Putting It All Together


The healthcare sector is poised to make history. ICT can be foundational to
this transformation, but providers seeking to insert value in this ecosystem must
heed the following:

> Providers should follow the Hippocratic Oath as the compass. Patient
care is at the heart of this sector. Any application that improves patient
care will grab attention. However, with many facilities operating at or
below breakeven points, doing more with less is more than a trite saying
on a coffee cup. ICT stands in a unique position to simultaneously
provide enhanced patient care options while improving efficiencies (as
the cases of eICU, EHR, and remote home monitoring illustrate).

> Less is more. Like its large organization counterparts, these healthcare decision
makers are likely to reduce take rates on overly complex service definitions. In
other words, the more advanced the service, the more likely the decision maker
is to restrict its access to a more finite employee population. The result would
be decreasing revenues for service providers that bundle too many capabilities
in an offering. Providers should offer the basics in a world where simplicity
is craved. But, they should also provide incremental capabilities for niche
audiences willing to pay more for innovation.

> Security and support are second nature. This is a market where seconds
count. Providers should offer comprehensive support options, including
standard 24x7 live help desks, enhanced with dedicated and localized
account management, when possible. Security takes on a whole new
meaning with this segment. End-to-end network security is a table stake,
and providers won’t earn much more in willingness to pay by offering
this fundamental requirement, though they also won’t get past the front
door without it. Providers should think of network security as their
ticket just to earn the right to play the game. But, those offering advanced
biometric techniques (such as voiceprint authentication for callers) will
appeal to this security-conscious audience that is willing to pay more for
more robust performance.

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The iPad has already demonstrated the power of a platform in attracting


developers that can design applications tailored to this market. And, research
supports that leveraging the network as a platform offers this potential to
providers looking for their place in this value chain. With regulatory reform
providing incentives to this market, providers are primed to support this
transformation for a technologically fragmented segment. Once technology
begins to work for practitioners, rather than vice versa, patients benefit. And,
isn’t that what healthcare is all about in the first place?

Now that we’ve explored how regulatory reform is changing the complexion of
this market, let’s turn our attention to a market that is no stranger to regulation
itself—state and local governments.

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govern-
chapter 13

ment
protector,
employer,
and servant

government: protector, employer, and servant | 211


the shift

Key Chapter Highlights


Governments are in an interesting predicament.
On one hand, they must respond to an increasingly
collaborative constituent base and embrace
transparency in communications. On the other, they
must protect information central to our nation’s and
their citizens’ security. Technology has a role to play
in addressing this dichotomy.

Given this challenge, governments place security


as a higher priority—and value—than the most
comprehensive customer support package.

Governments have a penchant for contextually


based services—those that enable employees to find
one another quickly based on presence information,
as an example. At the same time, they are more
likely than their vertical counterparts to have
employee policies in place that enable such services
to be introduced within their organizations.

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> How many employees are in your company? A few


hundred? Several thousand? Tens of thousands? Process this factoid: US federal,
state, and local governments employ roughly 20 million people. This staggering
number gives the government the unquestionable moniker as the nation’s largest
employer, dwarfing the largest single private employer, Walmart, which comes in
at slightly more than a million US employees by comparison.

Imagine attempting to collaborate with 20 million co-workers. Critics in the


audience are calling “Foul!” right about now. Not all 20 million government
employees must work together. It’s a complex labyrinth of federal, state, and local
agencies. You would be right. But, consider this counter-argument. The smallest
state in the Union, Rhode Island, collects more revenues than many Fortune 1000
companies today and alone employs close to 20,000 people, proving that even the
humblest of these government entities can rival the size and scope of our nation’s
largest enterprises. And, to further the point, the very complexity of multiple
federal, state, and local agencies exacerbates an already challenging problem in
attempting to connect so many individuals in the first place. In 2006, the Justice
Research and Statistics Association identified over 250 information-sharing systems
supporting just 35 states and Canada—over seven systems, on average, per state!190

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the shift

Despite (or because of ) its enormity, the government often finds itself lagging the private
sector in technological advancement. And yet, it hardly trails the private sector in its need
to share information urgently. Recent examples, such as 9/11 and Katrina, are painful
reminders of what can happen when communication breaks down. For government
agencies, security breaches or lapses in communication translate to far more than just
lost dollars and cents. When you consider constitutional freedoms, if not very lives, may
be at stake, the dynamic becomes much more interesting and challenging. If any entity
needs seamless, interoperable communications, it’s the government. And, the confluence
of a new administration’s promise for transparency intersected with an increasingly tech-
savvy, connected constituency marks an interesting time for providers serving this space.

Transparency Builds Trust (and Risk)


Government should be transparent, participatory, and collaborative. That’s not
our opinion. It’s the direction as laid out by President Barack Obama—both in
his former life as a candidate on the campaign trail and as outlined in a memo
he penned upon taking office. The vision is not surprising from a candidate
who revolutionized campaign fundraising using social media weaponry. In
February of 2008, challenging Republican candidate John McCain managed
to raise $11 million for his presidential bid. That same month, then Candidate
Obama raised $55 million using social media and the Web.191 And, the same
open philosophy and social connectedness he so successfully fostered while on
the stump prevail in his current administration.

If results from the American Customer Satisfaction Index (ACSI) are any indicator,
President Obama may be on to something. The independent organization, which
measures satisfaction ratings across several industries, discovered a simple truth in
its latest study: Transparency builds trust. According to the study, citizens who
are highly satisfied with a federal government website are 52% more likely to trust
the government.192 To the extent trust translates to votes, government leaders
face an interesting and unenviable dichotomy. On one hand, constituents expect
and even prefer to use social media tools to engage with their public leaders. This
point couldn’t have been made clearer than when Facebook reported it accurately
predicted more than 70% of the 2010 Congressional races, based on the number
of fans the candidates had earned on the site.193 On the other hand, transparency

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in communications and information-sharing creates risk in the system. Let’s


examine each end of this dilemma.

First, citizens have become acculturated to a hyper-connected society. Not


only do they prefer to interact with 21st century tools, they become more
participatory when they do. Consider the following:

> The previously mentioned ACSI study also shows that citizens’
perception of e-government services went up for a second consecutive
quarter in 2010 and, at the time, was at the highest level since
measuring for the index commenced in 2003. In contrast, satisfaction
for offline government services had been dropping.194 In short, citizens
are more satisfied with tools that facilitate virtual transactions and
communications. These offer a better alternative for most than waiting in
onerous queues at their local agency or on the phone.
> When the federal government was interested in taking the pulse of the
American people to capture their thoughts on the next major discovery
breakthrough, it received over 2,000 replies via Twitter and Facebook
within 48 hours of asking the question via the sites.195
> When Pinellas County, Florida hosted its first e-town hall meeting
(a live, virtual event where local citizens can engage via their computers),
it attracted over 1,000 viewers and 602 blog readers, generating over
300 published comments from this audience. In comparison, an average
conventional town hall meeting gathers 100–150 attendees.196

Citizens have also been educated that virtual capabilities are, or at least should
be, more cost-effective than other alternatives. As such, there is a growing
expectation that governments do more with less by adopting these newer
technologies. Here are some examples:

> Based on a study of 1,000 US registered voters conducted by Google and Clarus
Research Group, 92% believe “public agencies should make better use of new
technologies to cut government spending and improve efficiency.” Further, 70%
agree we should use “the computer power and expertise of private companies
to improve information technology departments in government agencies.”197

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the shift

> According to Google, Los Angeles saved more than $1 million per year
after outsourcing the hosting and management of its email system. In the
same study, over 70% of voters want their state and local government to
consider the same solution.198
> In addition to e-town hall meetings generating significantly more traffic,
costs are up to 66% less than the traditional face-to-face alternatives.199

Citizens’ enthusiasm for a more open government is met in measure by a tempered


reaction from public officials who respect the sanctity of sacred information. If
the ACSI study proved transparency builds trust among constituents, multiple
other studies corroborate it also imposes risk for those serving them. Government
officials are the former architects of a “need to know” worldview. Not surprisingly,
concerns over security pour cold water on this otherwise hot trend. Notably:

> A survey among 300 state, county, and municipal tax collecting agencies
found 70% of respondents unwilling to put document or payment automation
in a cloud-based environment (Sources: The Association for Work Process
Improvement and International Accounts Payable Professionals).200
> According to a study by EastWest Institute, a nonpartisan think tank,
nearly three out of four government officials polled were uncomfortable
using social media to share information.201
> A study commissioned by Lockheed Martin Cyber Security Alliance found
one-third of government IT decision makers unfamiliar with cloud computing
with a similar percentage distrusting of it. Seventy percent of respondents were
most concerned about data security, privacy, and integrity in the cloud.202

At the time of this writing, security worries have reached a fever pitch, with US
intelligence and actual lives put at risk with the WikiLeaks exposure. However,
despite these legitimate concerns, multiple examples point to a government
tapping into a new wave of innovation, using developers and popular app
storefronts to further its cause. Developer competitions offering prize money
for applications that leverage public data are becoming more commonplace, led
by the pioneering efforts of New York, Washington, and Portland, Oregon. The
Pentagon issued its “Apps for the Army” challenge to the developer market. In
total, more than 350 applications using public information are now available

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to further engage citizens.203 And, in the spirit of transparency, one-third of


government IT professionals expect to execute a social networking initiative
within the next year, with or without stimulus funding, according to a recent
study of over 500 decision makers released by the Computing Technology
Industry Association (CompTIA).204

So, how does a government aspiring to have a more transparent, participatory,


and collaborative working relationship with its constituents and already
leveraging popular 2.0 development platforms to do so evaluate network-based
capabilities that could accelerate the same? Alcatel-Lucent canvassed 300 state
and local government decision makers to find out.

Speaking Volumes
Similar to other end-user segments, we disguised network-based API functionality
in the form of service definitions identifiable by respondents. Each service
was a composite of several network-based APIs working in harmony. By first
understanding which applications were most appealing to these decision makers
and then dissecting those services into distinct API functionality, we can assess
how these capabilities affect respondent demand.

To this end, we tested over a dozen applications and measured interest and
willingness to pay for each. Given our preamble on the increasing transparency
of government and convoluted interworking relationships between disparate
agencies, it is not surprising that communication-oriented services reigned
supreme. This was the case whether the application facilitated better internal
cooperation or a more participatory engagement with constituents.

And, when it came down to measuring what service functionalities most moved
the respondents’ willingness to pay, presence-based capabilities took the prize.
Respondents showed high interest and demand for the ability to do the following:

> Send automatically formatted text, email or IM messages to co-workers


or constituents based on the device currently in use (as a reminder, this
API also took top honors among developers)

government: protector, employer, and servant | 217


the shift

> Automatically have a call redirected to a person based on the most


accessible device
> Determine the status of a person, including current device in use and
available bandwidth

When asked for their key priorities in allocating budget and resource requirements,
the majority of respondents pointed to increasing employee productivity (56%) and
reducing operational expenses (52%). And, based on their evaluation of services
and functionalities contained therein, communication enablers are critical factors
of persuasion. When it comes to communicating, these decision makers can’t seem
to get enough real-time information. Given their current challenges in collaborating
with one another and their constituents, this point speaks volumes.

Security is Not an Option


As we did with other customer segments, we asked these decision makers to
evaluate multiple value-added options as part of a bundle. Among these: live
24x7 help desks, dedicated and localized account support, moderated email
forums, and deployment training classes for new services. While a comprehensive
support package encompassing all of these elements performed well enough
to influence interest and willingness to pay, it couldn’t rival the demand for a
secure network underlying the services. That is, respondents evaluated any
service traversing a secure, end-to-end network as being more valuable than one
surrounded by the most comprehensive of support packages. Security by itself is
more important than responsive support.

Privacy is Not a Barrier


Interestingly, this segment is the most likely to have policies in place that mitigate
employee privacy concerns with contextual APIs. That’s an encouraging indicator,
especially for a market enamored with presence-based APIs that can determine
the availability or status of an employee. Specifically, 69% of respondents
indicated their organization has policies capable of profiling or monitoring an
employee’s behavior, including content and bandwidth consumption or time
spent on the network. Further, when considering new services that deal with

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location, presence, or profiling of employees, 60% indicate existing policies are


sufficient to protect employee privacy concerns with an additional 24% in the
process of implementing such guidelines. Only 15% report that existing policies
are insufficient and would first need to be defined and agreed to before such
services could be introduced in their organization. The bottom line: The majority
of state and local governments are well positioned to introduce contextual-
based services without violating employee privacy policies and exhibit healthy
willingness to pay. These factors create the perfect storm of opportunity for
providers tapping into this communication-challenged market.

Putting It All Together


If you think communicating in a private enterprise has its challenges, imagine the
complexity of doing so within a government. Governments are more likely to have
natural silos associated with unique agencies and jurisdictions. They are more likely
to trail the private sector in adopting newer technologies. They must be more
vigilant in safeguarding information to protect their citizens. Governments are of
the people, for the people, and by the people. And, it is connecting the people—
both internally and externally—that sustains the lifeblood of a functional and
transparent government.

For providers and developers addressing this estimated $100 billion ICT
market,205 consider the following:

> Recognize that governments are juxtaposed between two opposite


extremes: the escalating expectation of Government 2.0 services from an
increasingly tech-savvy constituency balanced against the imperative to
safeguard sensitive information. This puts these decision makers in a bit
of a schizophrenic stance—one that must balance open communications
within a protective framework. Indeed, this new paradigm challenges
the core of government thinking and opens the door to speak about
innovation in a much broader sense than merely technology to these
decision makers. To this point, IBM recently released a global study of
government CIOs (over half of whom were in the United States) and found
that 50% of state and local governments identify business model changes

government: protector, employer, and servant | 219


the shift

as one of their greatest challenges. This places these leaders in a comparable


category to their private sector counterparts, with 54% of the latter
indicating the same. Application Enablement offers new business models for
all within the ecosystem and is one potential remedy to an ambiguous and
escalating challenge for these public CIOs.
> Exploit presence-based capabilities that intuitively find individuals connected
to the network. Not only are these highest in demand, but governments are
more likely than any other vertical segment tested to have policies that address
associated employee privacy concerns.
> Prioritize security over support. Both are critical to governments but, when
betting with their wallets, these decision makers place a higher value on
network security over even the most comprehensive of support options.
> Simplify the functionality. Similar to their counterparts in other large
organizations, these decision makers are more likely to exercise judgment when
evaluating more complex service definitions. That is, the more sophisticated a
service, the more discriminating this audience is in estimating the number of
potential prospects within their organization. The result is that more robust
services are associated with fewer employees being offered access. And, with
a per-employee, per-month business model overwhelmingly favored by this
audience, fewer employees translate to lower revenues for the service provider.
This is a case where the incremental price associated with a richer service
definition is more than offset by decreased estimates of employee usage. Keep
in mind that this is not a function of demand decreasing with a bundle. That
is, these decision makers are interested in purchasing sophisticated services.
However, they are also inclined to curtail expectations of how many employees
would have a need for such advanced technology.

In summary, the question is not if governments are interested in Application


Enablement. As of this writing, local jurisdictions are experimenting with text-
based 911 capabilities and governments are rewarding entrepreneurial developers
for innovative applications that serve the public’s interest. Government leaders
are increasingly aware of the opportunities and challenges before them in a 2.0
world. The more germane questions are how and when service providers will
insert themselves in this dynamic value chain. We’ve explored the “how” in this
chapter. The question now becomes “when” such opportunities will materialize.

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And, for many reading this book, that answer is now up to you.

chapter here | 221


the shift

222 | chapter 13
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edu-
chapter 14

cation
the global
achievement race

education: the global achievement race | 223


the shift

Key Chapter Highlights


The United States is increasingly being challenged
in the global academic race. Many view education
as the harbinger of our economy’s health. Some
countries outperforming the United States in critical
achievement objectives spend more on classroom
technology on a per-student basis.

Several trends point to the increasing role of


development and technology in this space:
• The digitization of content, similar to what was
witnessed in the music industry, is primed to
revolutionize the classroom environment as
devices become more capable and affordable.
• The virtual classroom, born and popularized on
college campuses, is now making its mark in the
K–12 space.
• The technology adoption of a generation
defined by its collaboration habits will serve as a
strong gravitational pull for educators seeking to
attract and retain the attention of Millennials.

For educators, the student remains at the center of


the debate. Educators must balance the desire for
academic freedom with the requirement to protect
academic integrity. As such, services seen to enrich
the learning experience while affording academic
control will find a primed market.

224 | chapter 14
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> As the United States stares down the barrel of a


double-digit unemployment rate, it’s almost inconceivable to imagine our
country facing a labor shortage anytime in the near future. Yet, that is precisely
what a recent report by the Georgetown University Center on Education and
the Workforce predicts. Specifically, companies seeking college-degree holders
may soon find themselves in a quandary. The estimated shortage averages to
an annual deficit of 300,000 college graduates between 2008 and 2018. While
unemployment will remain a factor for job seekers for some time, it appears our
country is lacking in developing candidates for a new “college economy”—one
represented by a shift in degree-holding positions from 28% in 1973 to 42% in
2007. Much of this change can be attributed to the rise in technology in the
workplace and its associated cannibalization of blue-collar jobs.206

Make no mistake: The United States’ position as a superpower is increasingly


correlated to its ability to keep pace in a global academic race. As such, education
is taking center stage as the harbinger of our economy’s health. And, the current
landscape is sobering:

> According to the 2006 Program for International Student Assessment


(PISA), an index that measures 15-year-olds’ performance in reading,

education: the global achievement race | 225


the shift

mathematics, and science literacy every 3 years across 57 countries, the


United States ranked behind 28 countries in the latter category (including
Estonia, Croatia, and Latvia, to name a few). In fact, the United
States scored below the average of the 30 countries included from the
Organization for Economic Cooperation and Development (OECD)
for this index. Sadly, the same is true for the mathematics measure of
the Assessment, where the United States again scored below the OECD
average, with 31 countries performing better on this attribute.207
> The percentage of American students earning a high school diploma
has dropped for the second consecutive year, according to Education
Week and the Editorial Projects in Education (EPE) Research Center.
The percentage of students earning a diploma in 4 years decreased from
69.2% in 2006 to 68.8% in 2007, translating to 11,000 fewer graduates
in 2007. At its peak in 1969, the national graduation rate was 77%.208
> When the national nonprofit group Project Tomorrow gauged high
school students’ interest in pursuing a career in Science, Technology,
Engineering or Math (STEM), only one in five students in grades 9–12
said they were definitely interested.209 This lack of interest, coupled with
the United States’ lagging global literacy in these areas per the PISA
results, foreshadows an ongoing shortage of US candidates for these
positions and a resulting need to offshore these valuable jobs.

Some point to the lack of technology investment in US education as a key


contributor to deteriorating performance. A report by the Consortium for
School Networking (CoSN) found that countries like Scotland and the
Netherlands significantly outspend the United States in ICT capabilities in
the classroom. Specifically, in comparable terms, the United States spends
approximately $5.44 on ICT per student at the federal level, compared with
$10.80 in the Netherlands and $20.10 in the UK.210 Interestingly, both of these
countries outperform the United States in both math and science literacy, per
the PISA results.

The result from this growing academic gap to Gross Domestic Product (GDP)
is staggering and sufficient for everyone—whether a parent or not—to take
notice. According to a 2009 McKinsey report, had students from the United

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States performed as well as the average student in the best-performing nation,


the US GDP in 2008 would have been $1.3 trillion to $2.3 trillion higher.211 In
another study by the Alliance for Excellent Education, analysts estimated that if
dropouts were reduced by 50% in America’s 50 largest cities, the graduates’ extra
earnings would have amounted to approximately $4.1 billion per year, increasing
state and local tax revenue by as much as $536 million.212

Education is the catalyst to a healthy long-term economy. And, ICT is at the


center of sweeping transformation for this sector. Hot topics surrounding the
digitization of content in our schools, the virtualization of the classroom, and
enhanced learning techniques have long-term impact as to how this space will
evolve over the next several years and even greater implications to our country’s
long-term global standings in this intensively competitive academic race.

Never Judge a Book by Its Device


If you want to see an industry transformed by the digitization of content, look no
further than your pocket for the revelation. If you are like half of the population,
in it you will find your iPod or other MP3 device. Digital content and its
portable devices swept the music industry by storm, leaving many executives
and recording labels ill-prepared to address the change to their business model.
PricewaterhouseCoopers recently predicted that digital music sales in the
United States will exceed physical by next year—just 10 years following the
debut of the iPod.213 Billboard reported that Apple is now responsible for 26.7%
of music sales, leaving retail giant Walmart in a distant second place of 12.5%.214
Ten years. One industry. Complete transformation.

What MP3 players did for music, e-readers like the Kindle, Nook, and iPad are
hoping to repeat for the publishing industry. According to the Association of
American Publishers, US book sales dropped 1.8% in 2009 to $23.9 billion, but
e-book sales tripled to $313 million. While physical book sales clearly dwarf those
represented by e-books, some industry estimates place e-books as high as 20%–25%
of the market by 2012.215 And, given youth are typically among the frontrunners
of technology adoption, schools and universities seeking to learn from the music
industry’s mistakes are positioning themselves to exploit this emerging trend.

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the shift

However, the road ahead is paved with challenges. Among them:

> Digital Rights Management (DRM) challenges currently limit the


exchange between many e-readers. DRM is an answer to a content
provider’s concern over piracy of his creation. When content becomes
digitized and non-protected, replicating it illegally becomes a pastime for
those with idle hands and nefarious intentions. This concern dates back
to software itself and, if current estimates are accurate, its merit is more
relevant today than ever before. According to the Business Software
Alliance (BSA), the value of illegally downloaded software worldwide
exceeds the GDP of 100 countries, reaching a staggering $51.4 billion
in 2009 alone.216 Publishers and authors clearly want to avoid this pitfall
and, as such, different protection standards exist for various e-readers.
Want to buy a book for the Kindle and then read it on your Nook? No
can do (at least, not today). And, this point raises a challenge to schools
attempting to standardize the student experience while simultaneously
leaving all doors open to acquire the greatest breadth of content.
> Device limitations remain. E-readers are a giant step forward in many
ways—slim and lightweight packaging, long battery life, and intuitive
interfaces to name a few. But, with the convergence of e-reader
functionality into new tablet devices, like the iPad, many schools are
left pondering when to pull the trigger. Does one wait for the all-in-one
device or purchase a more affordable, though limited, e-reader today? If
the latter option is taken, popular e-readers are not designed for textbook
use today, given their smaller screens and black-and-white output. And,
if the former option is pursued, current limitations with the iPad must
be addressed to accelerate adoption within schools. Specifically, the
device currently lacks any remote monitoring capability, which prevents
a teacher from viewing what a particular student or group of students is
doing on the device—a critical function for a learning environment.217
> Student acceptance is questionable. According to a study by the National
Association of College Stores (NACS), 74% of students preferred printed
textbooks for their college courses. Corroborating this finding, the
University of Virginia’s Darden School of Business found that eight in ten
students engaged in a Kindle pilot would not recommend the device to an

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incoming business school student. Finally, a study released by the Student


Public Interest Research Groups (PIRGs) showed that seven in ten college
students prefer printed textbooks “if cost is not a factor.”218 These studies
demonstrate the need to overcome practical usability hurdles if e-readers
or tablets are to be widely accepted by students. Among the complaints:
students missed the ability to highlight text directly, take notes, and flip
back and forth between textbook pages easily.

Despite these hurdles, the current momentum is one suggesting a question of


when, not if, e-books will reach critical mass on college and K–12 campuses.
Among the frontrunners: Clearwater High School has announced plans to replace
textbooks with e-readers next year, Stanford University is moving to create its first
“bookless library,” and the Illinois Institute of Technology will provide a free iPad
to all incoming freshmen at the start of the next fall semester. As e-readers gain
popularity for academic use and more content becomes digitized and stored in
the cloud, the network has a critical part to play in safeguarding these assets and
optimizing the user experience, regardless of form factor.

The World is My Classroom


Welcome to Greenfield, Massachusetts. Population: 18,000. The quintessential
picture of Small Town, America. And, the future home to Massachusetts Virtual
Academy at Greenfield, open to students across the state from kindergarten
through Grade 8.

This forward-leaning school district is taking advantage of an obscure provision in


the state’s sweeping education reform law signed in January of 2010. Specifically,
schools are encouraged to pursue innovation in equipping children with 21st
century skills (those enabled by a technology age). And, Greenfield will be among
the first to create a public school that exists almost entirely in cyberspace.

Virtual campuses are not a new concept in the higher education space. According
to numbers released by the Instructional Technology Council (ITC), distance-
learning enrollment continues to grow faster than overall college enrollment
numbers, jumping by 22% in American community colleges during the 2008-

education: the global achievement race | 229


the shift

2009 academic year.219 Another study by the Alfred P. Sloan Foundation found
a 17% increase in online course enrollment, with more than one-quarter of US
college students participating in at least one web-based course during the fall
2008 semester. According to the same study, three-quarters of campuses with
online programs said demand increased over the past year and two-thirds of
colleges that do not offer web-based classes indicated student requests for such.
Despite the encouraging growth, a stigma still prevails among some educators,
as Sloan found only a third of chief academic officers agreeing that their faculty
“accepts the value and legitimacy” of online learning, a figure that has held
steady since 2002.220

While born and popularized on the college campus, the virtual classroom is
now gaining traction in the K–12 space. Massachusetts state officials report
that approximately 40% of school districts had at least one student enrolled
in an online course in 2009.221 Advocates behind the approach cite expected
improvements to the statewide dropout rate, offering students struggling to
adhere to the rigidity associated with the traditional brick-and-mortar alternative
a flexible and convenient option.

As this groundswell continues, the need for real-time collaboration tools


intensifies. Nonprofit group Project Tomorrow found 67% of district
administrators and 51% of principals agreeing their ideal “school of the future”
would include the use of collaborative tools. Among students, the organization
found 51% in grades 6–8 relying upon collaboration tools to communicate
with peers and 28% to interact with teachers in completing schoolwork. The
results are more pronounced as the student ages. More than 60% of high school
students use collaborative tools to engage with peers and more than 40% to
communicate with teachers in the same way.222

Out of the Habits of Babes


Those of you who are parents of a teen or tween are all too familiar with how
today’s youth use technology as an extension of their lives. For those who aren’t,
consider the following:

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> According to a recent study by San Diego State University, more than
90% of college students use Facebook or MySpace regularly.223
> Nielsen shows that smartphone usage is 12% higher in households with
children than in those without, a factor potentially attributed to the
presence of children as influencers.224
> According to a Kaiser Family Foundation study of 8–18-year-
olds, children devote an average of 7 hours and 38 minutes per
day to consuming entertainment media. However, because this
generation embraces multitasking—the use of more than one media
simultaneously—they manage to squeeze in a total of 10 hours and 45
minutes into that roughly 7.5-hour period.225
> A separate study by Stanford found that while college students are prone
to multitasking behavior, they actually aren’t very good at it. The study
revealed that heavy multitaskers tended to be worse at filtering out
unimportant information than their low-multitasking counterparts.226
Anyone who has struggled to capture and keep the attention of a
Millennial can certainly identify.
> According to a Pew report, texting has become the de facto standard of
communication among teens. Fifty-four percent of teens report texting
with their friends daily compared with 33% who speak face-to-face with
their friends daily outside of school. One in three teens sends more than
100 texts per day. And, nearly half who take phones to school text at least
once a day in class.227

With all of these distractions competing for a student’s attention, what’s a


school administrator to do? Several are jumping on the technology bandwagon
to incorporate higher-tech, higher-sensory learning experiences into their
classrooms. And, the results are not merely self-serving, as some studies report
benefits to the learning process. A study administered by PBS and funded
by the Department of Education found iPhone apps can increase a child’s
vocabulary acquisition by as much as 31% within 2 weeks.228 Researchers at
the University of Rochester found that first-person shooter games can improve
vision, attention, and cognition (though critics point to the violence in these
games as significant deterrents to any instructional gains acquired).229 Further,

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the shift

researchers at the State University of New York in Albany reported that students
who play pro-social games that promote cooperation are more likely than others
to contribute in real-life situations, such as helping someone being harassed.230

The challenges associated with educating a hyper-connected, multitasking


and device-wielding generation should not be underestimated. Teachers are a
critical piece to this puzzle and data from Project Tomorrow suggests we have
a long way to go in building confidence among these skeptics. For example,
while 58% of principals included a mobile device for every student as part of
their vision for the ideal school of the future, 76% of teachers were worried
such mobile devices would be a distraction in their classrooms. While 46% of
teachers admit to using software-based tools to facilitate learning in reading,
writing, and math, less than 25% are inclined to using game-based learning
environments, podcasts, video, or real-time data in their instructional
techniques.231

Before technology will fully be embraced in the classroom, our educators must
first be convinced it will support, not deter, the learning process. And, short of
capabilities that protect our children, academic integrity, and network security,
the results will be a sub-optimized approach to what otherwise could be possible.

First, protecting our children becomes increasingly challenging in a virtual


world. Up to 35% of young people have been the victims of cyberbullying, per
a 2008 Centers for Disease Control report232, leading some 44 states to enact
laws prohibiting the bullying of students in school and online. Fueled by the
proliferation of social networking sites and the anonymity afforded through
popular teen applications like Formspring—where peer insults previously
plastered on the proverbial bathroom wall are now posted on the Web—this
area will be one of consternation for educators for the foreseeable future.

Next, protecting academic integrity becomes increasingly important. Instructors


need tools that facilitate collaboration among students without compromising
the learning process. As examples, some educators are turning to the popularity
of wikis and other 2.0 tools to have students collaborate with one another on
in-class group assignments. Researching Thomas Edison now becomes a group

232 | chapter 14
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online exercise with a possible final output being a Facebook page associated
with the legend. However, if a test on the inventor devolves into students
using electronic means to cheat, the balance of preserving academic freedom
while protecting educational integrity is compromised. Remote monitoring
capabilities and network administration rights become increasingly important
in this new learning era.

Finally, protecting the network itself becomes challenging in a world where


device adoption exceeds the norm. The problem becomes more significant in
higher education. Here, students expect networks to equip any device brought
on campus—from the tablet to the e-reader to the mobile device to anything in
between. And, these campuses tend to be ideal breeding grounds for the next
hacker with lots of time on his hands and technology proficiency in spades.
Perhaps that explains why college CIOs from the latest EDUCAUSE study
ranked security in their top three IT issues for 2010.233

It’s About the Student


Now that we have covered the landscape of opportunities and potential pitfalls in
an area directly linked to our GDP, let’s explore how administrators and educators
evaluated Application Enablement as a means to address the issues ahead.

First, educators are more inclined to select services that facilitate the classroom
as a community. Out of over twelve applications tested by Alcatel-Lucent among
300 educators, these decision makers overwhelmingly favored services that
enhance remote learning environments and secure communications between
multiple parties and devices—particularly between faculty and students.
More than one-third of respondents indicated they would be very likely to
purchase each of these services if it were made available to them. In comparison,
fewer than one in five was very likely to select services associated with better
interdepartmental communications. For these educators, it is first and foremost
about the learning environment. A distant runner-up in this race is facilitating
better internal communications among themselves.

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the shift

Next, when examining the role of specific network capabilities in influencing


willingness to pay for new services, again, the importance of network
functionality as dictated by a hyper-connected student population rises to the
top. The capabilities included:

> QoS capabilities that automatically format content and optimize it


for delivery over any device (remember the e-reader DRM challenges
mentioned earlier as a current challenge?), troubleshoot network
performance and connectivity issues across any device, and maintain a
seamless session as the user moves from one device to another reigned
supreme. This is a clear example of a highly fragmented device
population most evident at these schools and on these campuses, as
educators were unique in their penchant for QoS attributes.
> Presence capabilities that allowed for automatic and intelligent connection
to one or more parties, based on the device most accessible to each, and
seamless messaging functionality to any device were also popular.
> Finally, secure network storage options were also instrumental in
influencing willingness to pay. With our earlier commentary on the
digitization of media in this space, it should come as no surprise that
the New Media Consortium recently identified cloud computing as
one of the emerging trends to hit K–12 schools in the next few years.
And, our analysis reveals secure storage accessible from any device as
a key determinant among these decision makers when evaluating new
technology services.
> Like their state and local government counterparts, security was seen as more
important than the most comprehensive support package surrounding a
service. That is, a service described as traversing a secure network was more
influential in moving a respondent’s interest and willingness to pay than
one supported by a live IT help desk, localized account support, moderated
forums, and training classes. To this latter point, while training classes were
among the lowest value-added support options for other vertical segments,
educators responded fairly well to this idea, reinforcing the earlier point that
educators must first be comfortable with the technology before widespread
adoption in the classroom will be optimized.

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Putting It All Together


Educators are a segment primed for technology. The investment in ICT in
the classroom made by other countries has many questioning whether this
commitment is contributing to global student achievement rankings that leave
the United States significantly behind. And, while EDUCAUSE predicts that
higher education technology budgets will remain flat (if not decrease) for the
foreseeable future, our research suggests significant opportunity for new services
tailored for this market. Specifically, educators were the least price-sensitive
when compared with their counterparts in the other verticals tested (including
government, healthcare, and finance), with a willingness to pay that was two
to three times larger on a per-employee, per-application basis than that of their
peers. To tap into this growth, providers and developers should:

> Recognize that this sector is most influenced by a hyper-connected


student population. This brings a unique complexity to this world.
Students are more likely to adopt technologies faster than mature
segments, further exacerbating the problem. More devices breed the
opportunity for more problems. And, lest you believe that these student
technophiles are less reliant on IT for their needs, a study by Eduventures
and Cengage Learning found only four in ten college students saying they
receive adequate support for education technology tools on campus.234
As such, network capabilities that enhance performance, troubleshoot
problems, provide secure storage, and allow for seamless messaging and
communications across any device reign supreme for this segment.
> Offer security as a table stake. Security outranks the most comprehensive
of support packages in influencing willingness to pay. Educators must
simultaneously preserve academic freedom while protecting academic
integrity. Security within the network is critical to both. And, with
current device limitations associated with remote monitoring and the
need to provide administrative rights based on the classroom exercise at
hand, the role of a secure network will continue to grow in relevance.
> Keep it simple—at least initially. Like their large-enterprise and vertical
counterparts, the more sophisticated a service, the fewer revenues
are likely to be collected, in aggregate, by a provider. This is due to
the restriction these decision makers are likely to impose upon those

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the shift

within their organization who have access to such robust functionality.


As ICT becomes more integrated in the classroom environment,
more sophisticated services are likely to find a welcoming home as
these educators attempt to keep pace with the next generation of
technologically fluent students.
> Understand that technology acceptance stops with the instructor. If
teachers are not comfortable integrating ICT tools in their curriculum,
full momentum will never be realized. Providers offering these educators
the option of training classes with any new technology deployment will
discover an audience willing to pay for such instruction. Remember,
educators value education. Successful providers will incorporate this
commonsense approach within their offerings.

As our children continue to be lapped in the global academic race, the role of ICT
has never been more significant. As evidenced through our research, this market
is primed for providers and developers that understand the unique complexities
of being an educator in a 2.0 world. And, this is a case where trillions of dollars in
GDP may be at stake. If that doesn’t get your attention, check your pulse.

236 | chapter 14
the shift

chapter 15

IT in the
large
enterprise
In search of
relevance

IT in the large enterprise: in search of relevance | 237


the shift

Key Chapter Highlights


The role of the CIO is experiencing significant
transformation. Increasingly, these individuals
are being seen as change agents within their
organizations and must balance IT requirements
with CEO agendas.

Appetite for services depends on the segment in


question. Financial enterprises prefer services that
enrich relationships with their customers. General
enterprises gravitate toward services that optimize
internal communications. Providers attempting to
address this fragmentation should expose multiple
capabilities to a developer market capable of
building applications for each niche.

Security is central to the CIO agenda and is even


capturing greater mindshare among CEOs.

While bundling is a case for increased revenue


potential among enterprise IT developers, it is
the opposite for enterprise decision makers.
The latter are more likely to curtail estimates of
employee usage (and hence, revenue opportunity
for providers) when a service becomes more
complex. Providers must equip IT developers with
diagnostic tools about their customers (in this case,
the employees and decision makers within their
enterprise) to tune service offerings.

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the shift

> To channel the famous last words of late comedian


Rodney Dangerfield, Chief Information Officers (CIOs) “don’t get no respect.”
Certainly, one reading the tea leaves from market examples and research data could
form that conclusion. According to the State of the CIO report, nearly half of CIOs
report that Information Technology (IT) is still considered a cost center. Even
worse, over half of these CIOs believe they are responsible for setting technology
investment priorities despite being relegated to a cost center function; less than
one-third of business leaders in the enterprise agree. And, over 60% of CIOs have
canceled or postponed projects over the past year due to economic pressures.235

So, what do you get when you mix recessionary times with a cost-center reputation
and perceptual gaps between CIOs and their business peers? A challenging and
often misunderstood role for those in the IT space and ongoing questions about
the evolution of the CIO. In fact, when two multibillion-dollar private companies
decided in 2009 not to backfill their CIO positions at precisely the same time,
some were left wondering if the bell tolled for others occupying the role.236

While fatalists may be quick to prophesy the death of the CIO, we prefer to
view the landscape through a different lens. Rather than embrace Dangerfield’s
philosophy, CIOs would be better served taking a page from talented songwriter

IT in the large enterprise: in search of relevance | 239


the shift

Bob Dylan: “The times, they are a-changin’.” And, the relevance of the CIO at
the executive table is directly dependent on his ability to evolve accordingly.
The good news is that CIOs are aware of these shifting sands and are rising to
the challenge in droves. The same State of the CIO report finds three-quarters
of CIOs identifying the alignment of IT and business goals as a management
priority—the top concern mentioned. Further, the majority also agree that
long-term strategic thinking and planning will be the most critical personal
competency needed by their organizations in the coming year.237

For these reasons, the CIO role is more complex and challenging than ever
before. On one hand, these individuals must maintain the basic blocking-and-
tackling required to sustain operational performance in their organizations. On
the other, these leaders must be attuned to the corporate strategy in order to
anticipate the commensurate ripple effects to future ICT requirements. They
are simultaneously strategists and tacticians, technologists and business thinkers,
implementers and prognosticators.

As trends surrounding cloud computing, emerging security threats, increasing


cost pressures, and escalating customer demands abound, how do decision makers
in the large enterprise view the attractiveness of network-based capabilities as a
potential salve to these issues? Alcatel-Lucent canvassed 600 decision makers—
the majority in IT, executive, operations, and finance roles—in general and
financial enterprises with 100 or more employees to find out.

The Customer (or Employee) Comes First


Asking the question of which is more important, the customer or the employee,
is a bit like asking which came first, the chicken or the egg? Southwest Airlines
famously created a culture where the employee comes first. Treat your employees
well and they will respond in kind to your customer, or so the philosophy goes.
Many companies espouse the opposite, living by the adage, “the customer is
always right.” It seems this is a question with an answer that is easily debatable
on either side. And, in the case of our research, a business leader’s perspective on
which of these two stakeholders is more important depends to a large extent on
the industry of choice.

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For those in the financial segment, the customer comes first, as evidenced
by the more popular applications selected by these decision makers. When
asked to choose from over a dozen new services, these executives were more
inclined to select those that optimized communications among external
customers, rather than between internal employees. Among the more
popular tested were:

> A service that displays personalized customer information (such as


account history and previous contact information) on incoming calls
> An application that provides the decision maker with a view of the
customer’s preferences and browsing history across any device to support
more targeted advertising efforts (both of these services would be subject
to the customer opting in to having such information shared)
> A product that stores client financial records in a secure server accessible
by any employee on any device to optimize customer interactions

In turn, the network ingredients that were more likely to influence a financial
decision maker’s willingness to pay for a service were rooted in profiling
capabilities of the end user. Likewise, secure and accessible storage of these
customer preferences was equally attractive to these business leaders.

In contrast, those decision makers represented by a general mix of industries


(mostly from manufacturing) preferred services grounded in employee
productivity benefits, including:

> An application that optimizes employee productivity in meetings


through advanced voice, video, and collaboration capabilities
> A service that allows employees to dynamically boost network
bandwidth during times of need
> A product that detects and troubleshoots potential IT problems across
the network and supports forecasting of IT consumption needs
> A service that allows employees to dynamically and seamlessly shift from
multiple modes of communication (including IM, email, text, phone
call, and video conferencing) with the click of a button

IT in the large enterprise: in search of relevance | 241


the shift

Accordingly, for these decision makers, the greatest network value rests in
QoS capabilities. Specifically, respondents were more likely to be influenced
by network characteristics that boost performance, identify and troubleshoot
problems, and maintain session quality across fragmented communication
modes. In all cases, the role of the employee as the critical stakeholder becomes
clear in both the winning applications and network enablers for this segment.

Note that, while these audiences may differ in the value ascribed to internal
versus external communications, there is virtually no difference in their
assessment of key business priorities. When asked to identify the key motivators
in determining how resources are allocated, both groups selected reducing
operational expenditures and increasing employee productivity in their top
two priorities. While improving customer satisfaction ranked fifth in priority
among financial decision makers, their evaluation of services proves otherwise.
Perhaps for this audience, employee productivity translates to better response
times for customers (akin to the Southwest philosophy). Perhaps this is a classic
testament to the importance of peeling beneath the surface to discover latent
desires, not simply expressed needs, in research design. Or, perhaps this is a
case where attempting to parse out which customer—internal or external—is
more important is as fruitful as pondering if the chicken or egg came first. Both
are interconnected and, in an increasingly blurred IT landscape, CIOs will be
expected to serve both masters.

Security or Support? Yes, Please.


We won’t continue to beat the security horse (since we have already mentioned
it significantly in other chapters). Suffice it to say, enterprises across the board
place a value on services traversing a secure network. Here is what is more
interesting. To our earlier commentary on the role of the CIO evolving, there
is secondary evidence to support that these leaders are beginning to think more
like their CEO, and vice versa—especially as it pertains to the security hot
button. PricewaterhouseCoopers surveyed 7,200 C-levels in 130 countries to
assess how the recent recession is affecting investments in information security,
if at all. Among the more fascinating findings, when asked to select from a list
of seventeen possible strategies for meeting security objectives in the context

242 | chapter 15
the shift

of the economic downturn, CIOs appeared to channel their CEO and CFO
counterparts: prioritizing security investments based on risk. In turn, the answer
from CEOs and CFOs may surprise you even more. Their response is taken from
a page of the CIO playbook: increasing the focus on data protection.238 It is
one thing to suggest CIOs are beginning to think like the CEOs they serve. It
is quite another to state the opposite. And, one area catalyzing the convergence
in thinking between these functional leaders is security—yet one more aspect
reflecting how relevant this topic will be for years to come.

Our data also suggests a strong willingness to pay for the most comprehensive of
support packages surrounding these services, inclusive of 24x7 live help desks,
moderated forums, localized account support, and training classes. Both financial
and general enterprise leaders are likely to increase demand and willingness
to pay for a service encapsulated with responsive support. However, general
enterprise decision makers demonstrate a much higher willingness to pay for
this option than their financial segment counterparts. In fact, the former group
has the highest willingness to pay for support, services, and network capabilities
when compared with any other business segment tested (including finance,
government, education, and healthcare)—by several orders of magnitude.

The Case Against (and for) Bundling


One of the leading factors driving the elasticity of demand between general
enterprises and their vertical counterparts involves bundling. Consistent across
all segments is a tendency for decision makers to restrict the number of users—
and hence demand—for a service that is a composite of several capabilities. The
more sophisticated the “bundle” (or service) becomes, the more likely these
decision makers are to restrict its use to a more limited number of employees.
In a case where a provider earns revenues through a monthly fee per user
(overwhelmingly the favored business model as selected by these respondents),
this behavioral tendency among decision makers to contain access to a select
group of “power users” results in lower total revenue potential.

Recall that we saw the exact opposite effect among enterprise IT developers.
For these individuals, bundles of APIs translate to a simpler, faster development

IT in the large enterprise: in search of relevance | 243


the shift

process. And, that represents tangible value to an audience with limited time and
resources. These individuals are willing to pay up to three times more for a bundle
of network capabilities when compared against the total revenue opportunity of
each API offered separately.

But, in the case of a decision maker allocating funding to secure new enhancements,
the over-engineering of a service can have the exact opposite effect. More complicated
functionality creates a mindset for a more limited employee population.

Are IT developers simply out of touch? Are they so completely infatuated


with new technology that they grossly overestimate its value to the customers
within their companies? There may be some truth to this argument. However,
we would also submit that this is a case where IT developers, very familiar and
encumbered with cost pressures today, understand the value of being able to
develop more quickly in a time-compressed world. Since we didn’t beat the dead
horse on security, indulge us on this nag: The developer’s currency is time and it
is perhaps nowhere more clearly reflected than in his perceived value of a bundle
compared with that of his end users.

The Case for (and Against) Advertising


Ask an individual outright if they “like” advertising, and you’re likely to be rebuked.
However, we are each subjected to thousands of advertising impressions per day and
more than tolerate their presence in exchange for services (think of television advertising
where one “pays” with attention in exchange for “free” programming as the classic and
still prominent example). Even though the respondents in our survey are senior decision
makers of large enterprises, each is also a consumer at the end of the day. It should come
as no surprise that, when asked if they would subject their employees to advertisements
in exchange for up to a 20% discount off a service, they responded favorably—so
favorably, in fact, that a provider stands to earn more revenues with the 20% discount
than with no advertising subsidization at all. That is, demand for a service subsidized by
advertising increases more than the value of the discount. This is a case of classic price
elasticity. The lower price is more than offset by incremental demand. And, we have not
even calculated the upside revenue potential from the advertising itself in the equation.

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However, there is a catch. This phenomenon was only realized when the discount
was offered indefinitely rather than for a discrete period of time, such as 6, 12 or
24 months. For any of these fixed periods, advertising subsidization resulted in
lower total revenue potential for the provider. In other words, the discount was
not offset by sufficient incremental demand.

Putting It All Together


Large enterprises are no more complex than any other stakeholder examined
in this ecosystem. But, like every other audience analyzed, they have a unique
perspective that drives interesting peculiarities:

> The economic downturn may be a blessing in disguise. CIOs are


expected—and understand the need—to align IT resources with
business priorities. As they begin to think more like their CEOs, these
individuals are earning a seat at the executive table and are increasingly
being looked to as change agents within their organizations.
> Complexity abounds for the CIO. Not only do their employees
(in this case, IT developers) overestimate the value of sophisticated
services when compared with decision makers in the enterprise, the
perception of the latter shifts depending upon the business need. As
examples, financial leaders are more likely to value services that optimize
customer engagement. General enterprise leaders are more attracted
to applications that streamline internal communications. Providers, in
turn, face a complex paradigm. Exposing multiple network capabilities
simultaneously and in a bundled fashion addresses the IT developer’s
scarce resource of time. However, providers must enable these IT
employees, and in particular, the CIO, to better understand how said
functionality can be incorporated in practical—rather than over-
engineered—services more likely to be adopted by a greater population
of users within the enterprise. Arming CIOs with this analysis not only
gives them deeper insight into their customers’ needs (thus making them
more relevant within their organization), it also optimizes the revenue
potential for the provider.

IT in the large enterprise: in search of relevance | 245


the shift

> A service subsidized by advertising is attractive to these decision


makers. But, the case for incremental revenue potential is confined to an
indefinite discount period. Providers are advised to go all the way with
advertising, or not to go at all.

It is evident that “the times, they are a-changin’” for CIOs. Cost pressures
persist. Lines between employees and customers are blurred. Security challenges
abound. Rather than admiring the problems surrounding them, effective CIOs
are evolving to adapt to these changing times. And, leveraging the network
as an asset is a concept familiar to this ilk. As these leaders align IT priorities
with CEO agendas, network performance and profiling capabilities create
new opportunities to optimize customer engagement and enhance employee
productivity. We’ve quoted comedians and songwriters. But, neither captures
the state of the CIO’s world as perfectly as one who lives in it. Pat Toole, CIO of
IBM, once said of his professional peers, “If they [CIOs] don’t come out of that
cost-cutting mode and help drive the transformation of their company, they’re
going to be irrelevant.”239 We couldn’t have said it better ourselves.

246 | chapter 15
the shift

part 5

the 2.0 case


for latin
america
the shift

248
the shift

brazil chapter 16

and mexico
a tale of
two countries

brazil and mexico: a tale of two countries | 249


the shift

Key Chapter Highlights


Brazil and Mexico stand at the brink of economic transformation,
though their starting points and journeys are as different as
the sociopolitical climates that define them.

Each market possesses a consumer appetite for network-


enabled services, with projected willingness to pay even
higher than that found in North America in some cases.

Consumer attitudes toward network-enabled


functionalities reflect the current landscape of the
countries they call home, with Brazilians favoring
capabilities that provide for richer entertainment and
Mexicans preferring those with a security orientation.

While per-use payment is the preferred business model


in both countries, the case for bundling differs. That is,
a multifunctional service composed of multiple APIs
decreases revenue potential for providers and developers
in Brazil, whereas the opposite is the case in Mexico.

Advertising frequency decreases willingness to pay for


services; however, this deficit may be neutralized through
the use of personalized, targeted advertisements, which
are more favored by consumers in both countries.

Like their North American counterparts, Latin American


consumers overwhelmingly trust their service provider
over an application developer when it comes to sharing
sensitive contextual information about themselves, such
as presence, location, and online habits.

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the shift

> In 1859, Charles Dickens made literary history with his


fictional masterpiece, A Tale of Two Cities. In his novel, Dickens cast a story
of rebellion, sacrifice, and ultimate redemption set in two cities, Paris and
London, amidst the tumultuous backdrop of the French Revolution. The
legendary story, though fictitious in orientation, drew its inspiration from
history as Dickens brilliantly captured the struggle of a burgeoning middle
class in search of economic prosperity. In much the same way, a societal
revolution is occurring today on the global stage. Emerging countries have
earned their place in the spotlight, as the developing world has almost single-
handedly accounted for our global GDP growth while the United States,
Western Europe, and other established markets have struggled to keep pace
in recent years.240 In Latin America, two countries in particular, Brazil and
Mexico, are poised for significant growth, even if their starting points and
trajectories are as different as their unique market complexions. Despite their
differences, these countries reflect the promise of an emerging middle class
ready for its moment of economic prosperity.

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the shift

Mexico: The Uprising of a New Revolution


It is almost surreal that Mexico recently celebrated the centennial of its
revolution, as the country finds itself in a state of violent upheaval and societal
unrest. A Google search of “Mexico” renders over 1,000 news headlines telling
the horrific story of a drug war responsible for more than 28,000 deaths in less
than four years.241 The fear of extortion is a daily reality for citizens in some parts
of the country, with kidnapping rates soaring by over 300% in the past 5 years.
This staggering increase in abductions is leading to a new booming industry
estimated at $80 million per year; bulletproof cars, a luxury once reserved for
the elite upper crust, now represent a macabre necessity for the safety-conscious
middle class.242 And, in a sad twist of events reflecting the current 2.0 times, drug
gangs have resorted to flaunting their violent conquests via YouTube videos.243

Beyond these physical threats and casualties, the drug war has taken its toll on
the economy, with state-owned Petroleos Mexicanos reporting approximately
$350,000 in lost natural gas production daily due to physical threats against its
employees who are attempting installations in northern Mexico. That equates to
about $10.5 million per month, or roughly 2.3% of Mexico’s $450 million per
month average in monthly natural gas revenues.244 And, given that about half of
Mexico’s 107 million people still live in poverty despite its status as the twelfth
largest economy in the world,245 the socioeconomic impact of this drug war
reflects the current battle of a country whose revolution is more than an annual
commemoration. Unfortunately, it also overshadows the economic potential of a
country recently identified with nine others that, when combined, wield the third
largest economy globally behind the United States and the European Union.246

Despite these challenges, the potential for telecommunications as an economic


growth engine cannot be ignored. In particular, mobility is a seemingly indispensible
element for a nation under the weight of violent unrest while simultaneously
standing at the precipice of economic freedom. Market analyst Biometrics Market
Intelligence (BMI) recently reported the mobile market grew by 3.9% in the first
6 months of the year, reflecting the addition of 3.22 million new customers and
putting the country on a trajectory to attain 8% growth in 2010. BMI estimates
that Mexico will reach 105 million mobile subscribers by the end of 2014, reaching
a penetration rate of over 94%.247 This growth is leading to significant investment

252 | chapter 16
the shift

in the market by incumbent provider America Movil, which recently reported


its plans to spend approximately $8 billion a year in its networks through 2014.
And, providing yet additional opportunities to citizens in a market where mobility
is more ubiquitous than banking, the provider has also recently announced its
intention to offer financial services to about 50 million people in Mexico who have
mobile phones but no bank accounts.248 Intersect this mobile wallet capability with
the growth in mobile advertising options we discussed in an earlier chapter, and
one can easily imagine a new impulse economy of micropayments fueled by mobile
advertising and transacted via a mobile device.

Brazil: The Promise of a New Day


If Mexico is embattled with strife, Brazil is brimming with promise, thanks in no
small part to two events that will capture the globe’s attention in coming years:
The World Cup and the Olympic Games. Both projects will bring significant
benefits to the country in the way of investments in airports, roads, urban
transportation, and hotels, just to name a few. In 2010, Brazil’s GDP growth
is expected to reach 7.5% with 20% of the increase attributed to infrastructure
projects.249 The Olympic Games alone are estimated to generate more than four
times their investment of $6.5 billion to the country’s economy between now
and 2027 and more than 120,000 jobs a year by 2016.250

Indeed, Brazil is in the midst of its own uprising, reflected in the might of its growing
middle class. A few decades ago, a fraction of Brazilians, roughly 30 million, held
most of the country’s buying power. In just the past 8 years, the middle class—known
as Class C in Brazil—has swelled by 30 million, now representing 100 million of the
country’s 200 million inhabitants and propelling the world’s eighth largest economy
to an impressive growth rate. Most promising, this is a country where 20 million
people have risen out of poverty since 2003.251 As most of the globe struggles with
a recession, Brazil’s $1.3 trillion economy is booming, surpassing India and Russia
with a per-capita income twice that of China and creating over 2.2 million formal
jobs in the past 9 months, a record for the country.252

The rise of the middle class translates to a rise in consumption. In 2009, 4.5 million
cars were sold in Brazil, more than double the rate in 2003. The number of credit

brazil and mexico: a tale of two countries | 253


the shift

cards issued to consumers has increased 438% over the past decade. Airplane
boardings have risen 70% in the past 6 years.253 And, the growth of Brazil’s
telecommunications market is equally remarkable. With an online population
of more than 80 million, Brazil is South America’s largest Internet market and
now has more Internet users than any single country in Europe, according to
Forrester Research.254

These online users are no strangers to social networking. LinkedIn reports Brazil
is one of its two fastest markets in growth (rivaled only by China).255 comScore
ranks it second behind Indonesia in Twitter popularity, with 20.5% of Brazilian
Internet users over the age of 15 tweeting (compared to just 11.9% of the US
online population). In fact, Brazil leapt into the record books of pop culture
in the summer of 2010, when clever, albeit mischievous, Brazilian Twitterers
made the phrase “Cala boca, Galvao” one of the most popular retweeted
phrases globally. Puzzled by the meaning of the phrase, English-speaking
Twitterers were duped into retweeting it when told that doing so would result
in a 10-cent donation to save a rare Amazon bird on the verge of extinction
(a “Galvao”). In actuality, Galvao was the first name of Galvao Bueno, a Brazilian
sportscaster who irritated many with his pronouncements during the World
Cup. The phrase’s literal translation was a rebuke against Galvao, who was told
to “shut up.” And, it will be immortalized as one of the most popular tweets of
the year, thanks to the wit of a socially connected Brazilian online population.256
Finally, although Google has yet to make a dent in social networking in most
of the world, it has done so in Brazil with its site Orkut. In fact, over 51% of
Orkut’s total traffic comes from Brazil, with over 36 million unique visitors in
September 2010 from Brazil alone.257 In comparison, Facebook attracts roughly
9 million Brazilian visitors per month, according to comScore.258 Perhaps this
gap helps explain Facebook’s recent introduction of a new tool that allows Orkut
users to link their profile with their account on Facebook.259

The growth in telecommunications is not limited to online activities


in Brazil, as mobile usage reaches new heights. The country’s mobile
penetration rate topped 100% in October of 2010 according to Brazilian
telecommunications regulator Anatel.260 That means there are now more
registered mobile phones than there are people. The growth in mobile usage

254 | chapter 16
the shift

and economic value are correlated, and one could question which causes the
other. One study finds that adding ten mobile phones per 100 people in a
typical developing country increases GDP growth per person by .8 percentage
points.261 And, the wave of mobile broadband growth fueled by 3G networks
is already in full swing in the country, with Morgan Stanley estimating a 148%
increase in subscriptions over the past year.262 Affordable smartphones will
further catalyze this demand with Pyramid Research bullishly anticipating
that Brazil may see its first sub-US$100 smartphone in 2011, compared with
current price points in the US$200–$300 range.263 If accurate, the price point
will offer a swelling middle class the benefit of affordable mobile devices capable
of fully leveraging the capabilities of a 3G network.

Despite their many differences, one thing Brazil and Mexico share is the potential
for future economic growth, spurred in part by a developing communications
infrastructure. To that end, Alcatel-Lucent sought to evaluate consumer appetite
for network-based capabilities under an applications enablement framework.
We solicited the input of 1,000 mobile and broadband users in Mexico and
Brazil and measured their willingness to pay across 19 next-generation service
definitions composed of 22 network APIs. The results confirm a rosy outlook
for communications services despite inherent market differences that reflect the
diversity of these national cultures.

Service Definitions Reflect Market Conditions


Despite Mexico and Brazil being at two very different turning points in their
histories, consumer interest in next-generation communications services is
equally high. The least popular service out of 19 tested still attracted nearly
one in five consumers by their indication to be “very likely” to purchase the
application if it were made available to them. For the most popular service in
the bunch, the interest level jumps to nearly one in two consumers being “very
likely” to purchase. In both Mexico and Brazil, there is more alignment around
the most popular services than there are differences. Among them:

> An advanced Caller ID service that, among other things, reflects the
current location and social networking status update of the incoming caller

brazil and mexico: a tale of two countries | 255


the shift

> A gaming application that offers consumers profiling capabilities of


other gamers who match their skill set (whether they are logged into the
game or not) and provides storage of virtual rewards collected, purchases
made, and recorded games made accessible from any device
> A service that optimizes communications and entertainment activities
within the household, including the capability to store familial records
and entertainment files in the network and a geofencing option to
automatically detect when a family member has arrived home based on
the location of one’s mobile device.

While equally popular in both countries, a deeper dive into what features
drive willingness to pay reveals the reality of very different market landscapes.
In Mexico, the appetite for security at multiple levels is clear. Out of the
22 network APIs tested, the one with the highest influence in moving a
respondent’s willingness to pay for a service definition involved biometric
authentication, such as voiceprint identification, to restrict use of the service
and access to network-based content to only those authorized. In fact, the value
of security is so strong in Mexico that a service traversing a “secure network”
increases willingness to pay by over 20% compared with the same service
where such a distinction is omitted. (In contrast, this designation increases a
Brazilian’s willingness to pay by less than 10%.)

Additionally, the impact of security paints a different picture of what Mexicans


are willing to pay for and expose about themselves relative to their Brazilian
counterparts. Location-based APIs were among the lowest revenue producers
among Mexicans, with the ability to locate a mobile device faring the worst of
the 22 tested. (In contrast, this was among the top revenue-producing APIs in
Brazil.) In fact, for Mexicans, one of the only service definitions where location
was perceived as an attractive attribute was in the case of remote healthcare
monitoring of chronic diseases, such as diabetes, whereby the exact location of
those under care could be detected at all times. In a country with one of the largest
Type 2 diabetes populations in the world and where the market for diabetic care
is expected to exceed $1.2 billion in 2014, service providers and application
developers would be wise to take notice.264

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In the case of what Mexicans are willing to share about themselves, the trusted
role of the mobile provider could not be clearer. Interestingly, Mexicans are more
comfortable sharing such contextual information with their mobile operator
than they are with people they know. While the same finding holds true in Brazil,
it is much more pronounced in Mexico, with well over one in two consumers
expressing they are much more comfortable in exposing presence, location, and
behavioral habits to their mobile provider, compared to just over one in three
who feel the same way in Brazil.

If Mexicans are drawn to security-conscious service definitions that enhance personal


safety and well-being, Brazilians reflect their culture’s appetite for entertainment
on the consumer’s terms. For Brazilian consumers in our study, the most attractive
service definition in terms of both interest and willingness to pay dealt exclusively with
entertainment—from receiving personalized content recommendations based on
viewing habits to watching the programming on demand, on any device, and with seamless
shifting (the ability to pause a program on one’s television and resume it automatically
from that point forward on a mobile device, for example). While location and QoS
capabilities were less attractive in Mexico, these functional ingredients successfully drove
up willingness to pay in Brazil, where the ability to receive entertainment on demand
and optimized for consumption over one’s current network and device reigned supreme.

At the same time, the impact of a provider’s brand in influencing a consumer’s


willingness to pay reflects the power of Google and popularity of social
networking in Brazil. Specifically, a service offered by Google commanded
more than a 20% premium in terms of willingness to pay in Brazil (even higher
than a service offered by local service provider incumbents). The same was not
the case in Mexico, where the Google brand scored below the average and well
below Telmex, the incumbent service provider, which itself attained a more than
20% premium in willingness to pay. Why the significant difference in Google’s
performance, where its brand value translates to an unmistakable premium in
Brazil and yet represents a pricing disadvantage for the company in Mexico? We
would submit it may have something to do with the popularity of Google’s social
networking site, Orkut, in Brazil. To put a finer point on how popular Orkut is,
Google vice president, Marissa Mayer, has even admitted, “You talk to people in
Brazil, they’re like, ‘Oh, Google – you mean the subsidiary of Orkut?’”265

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the shift

The Clear Case for the Right Model


– and the Not-So-Clear Case for Bundling
Perhaps there is no area in which Brazilians and Mexicans agree more fervently
than in the business model that is favored by both. You may recall from the
North American consumer study that no one payment model prevailed across
all consumer groups (with social networkers favoring a per-use model, online
video enthusiasts preferring a monthly model and gamers revealing an aversion
to one-time fees). While North America reflects complexity in its ideal model
(one where the provider’s or developer’s revenue is maximized), Brazil and
Mexico reveal simplicity. That is, there is absolutely no doubt that a per-use
model is favored overwhelmingly by consumers and, as such, has the potential
to maximize revenues for providers and developers. This finding reflects the
popularity of prepaid subscriptions in both countries, where one pays upfront
for a specified number of uses. In Brazil, for example, 82% of registered mobile
phones are on a prepaid account.266

Unlike North America, where bundling multiple APIs in a service clearly


resulted in a higher willingness to pay among consumers, the situation is a bit
more complex in Latin America. In Mexico, where the average willingness to pay
is somewhat lower than that found in Brazil, the opportunity to increase revenue
potential rests in bundling multiple APIs in a single service definition. That
means that a service where two or more APIs are combined yields roughly 10%
higher revenue potential for a provider or developer than that of independent
services operating with a single functionality. While the revenue boost is not
as high as what we discussed for the North American market, Mexico is again a
bundling case where more equals more.

The same cannot be said for Brazilian consumers, where increasing the
functionality of a service by combining the capabilities of multiple APIs actually
results in decreased revenue potential for the provider or developer. In Brazil,
consumers follow the adage, “less is more.” For this market, consumers are
attracted to simplicity and core functionality. Overcomplicate a service and
suffer the consequences of lost revenue potential.

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the shift

The Case for Targeted Advertising


eMarketer recently predicted that ad spending in Latin America will grow
anywhere from 6%–9% annually through 2014. While television will retain
the majority of these dollars through 2012, online and mobile advertising will
be bolstered by increased penetration of these services. According to their
estimates, the number of Internet users in Latin America has been increasing at
about double the rate of population growth. Mobile is even more popular for
many countries in the region, where about half of the population had Internet
access and about two-thirds had mobile phones at the end of 2009.267 And, if
you guessed that the potential for advertising growth in the region is correlated
to the two largest countries in the way of population and economy, Brazil and
Mexico, you are reading the right chapter of this book.

We were curious about the tolerance for new forms of advertising across
online and mobile environments. We tested the influence of advertising on a
consumer’s willingness to pay (and a provider’s ability to maximize revenue
through an advertising-subsidized, or “freemium”-based approach). Unlike
North American consumers, who tested as having a surprising tolerance to high-
frequency advertising models, Latin American consumers are not so forgiving.
Revenue potential decreases precipitously across most segments as the frequency
of advertising impressions increases, from a low of eight times to a high of thirty-
two times per month for a particular service. While a provider or developer may
more than offset the decreased revenue potential of consumers who will certainly
not pay the same price for a service that includes ads versus one that does not,
we did stumble upon a finding that should give hope to providers, developers
and advertisers alike. The use of personalized, targeted advertisements can
alone neutralize the negative impact on willingness to pay for some segments
of the population. If targeted advertisements are offered (as opposed to generic
impressions), a consumer’s willingness to pay for the service—even when a high
frequency of ad impressions is incorporated—rivals that of a service that includes
no advertising at all. So, although these Latin American consumers are less
tolerant of high-frequency ad models than their North American counterparts,
their preference for targeted advertisements combined with healthy growth
rates in online and mobile populations, provides fertile ground for providers,
developers, and advertisers.

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the shift

Putting It All Together


Emerging markets will drive global economic growth for some time to come. In
Latin America, the markets with the largest population and economy are Brazil
and Mexico. And, although these two countries could not be further apart in their
current socioeconomic climates, both offer a market for providers, developers,
and advertisers interested in riding the wave of growth in communications
services. Here are some specifics:

> Healthy appetite exists in Brazil and Mexico for services that incorporate
network-based functionality, like presence, profiling, and QoS. In Brazil,
there is a stronger inclination to location and QoS capabilities that
enhance one’s entertainment experience. In Mexico, the importance of
security—whether in serving to protect safety as with location-based
services or in authenticating credentials as with biometric capabilities—
should not be ignored. These unique differences reflect the current state
of affairs in each market.
> The optimal business model for maximizing revenue potential is prepaid.
Unlike their North American counterparts where the preferred business
model varies depending on the market segment, this single per-use
business model is overwhelmingly preferred by all consumer groups in
the Latin American study.
> At the same time, the case for bundling is not nearly as straightforward.
While bundling APIs results in greater revenue potential in Mexico
(similar to the North American market), it is the opposite case for
Brazilians, who favor simplicity and core functionality over complex
service definitions.
> These markets are primed for advertising. Not only are online and
mobile subscriptions growing at a rate faster than the population, the use
of targeted advertisements alone can mitigate a lower willingness to pay
among consumers as advertising impressions increase. Using contextual
APIs, such as a consumer’s presence, profile, and location, offers
unique opportunities to serve targeted ads to this market. However,
such an opportunity does not replace the requirement for an explicit
opt-in approach, whereby the consumer remains in full control of this
contextual information at all times.

260 | chapter 16
the shift

Brazilians and Mexicans find themselves at an interesting turning point in their


cultural history. While Mexicans wrestle with a new revolution of violent unrest,
Brazilians will soon take center stage as the hosts of two of the most popular
sporting events in the world. As Dickens so memorably penned more than 150
years ago in his masterpiece, “It was the best of times, it was the worst of times,”
so is the case for these two nations standing at the brink of economic prosperity.
Communications services definitely have a role to play in this revolutionary
transformation. And, for those who recognize the potential of these emerging
markets, the best of times is yet to come.

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the shift

262 | chapter 16
the shift

small chapter 17

business
latin america’s
growth engine

small business: latin america’s growth engine | 263


the shift

Key Chapter Highlights


Small businesses are the growth engine of any
sustainable economy. Latin America is uniquely
poised to develop an economic climate conducive
to private growth, with Mexico showing the most
impressive strides among any of its regional
counterparts in doing so.

Small businesses are not merely more sophisticated


consumers. In an Alcatel-Lucent primary
research study, they differed from their consumer
counterparts in selecting which specific API
functionality most moved the needle on willingness
to pay, in their preference or aversion for bundling
these capabilities, and in their choice of payment
model, among others.

Approximately 90% of Latin American small


businesses in our study would be likely to stay with
a provider that offered network-enhanced services,
representing a compelling business case to mitigate
churn risk.

While small businesses in our study tend to like


contextual APIs, such as presence and profiling,
many are ill-equipped with company policies
to introduce services that incorporate these
capabilities. Providers and developers must
understand and prepare for this hurdle before
attempting to address this demand.

264 | chapter 17
the shift

> In his socioeconomic thesis, “Why Isn’t Mexico Rich?”


author Gordon Hanson laments the lackluster economic performance of a
nation struggling for growth despite numerous attempts at economic reform.
Hanson presents a compelling case, explaining Mexico’s seemingly unending
battle for prosperity amidst the challenges of poorly functioning credit markets,
distortions in the supply of non-traded inputs, questionable incentives for
informality, and an export market that competes with China.268

If historic performance is any evidence of success, Hanson may be on to something.


The author points to an economic growth rate that places Mexico below most
of its Latin American peers, including Brazil, and shows the country’s economy
trailing those of Southeast Asia and Eastern and Central Europe.269 But, as many
economists would argue, small business is the lifeblood of economic prosperity
and, if the World Bank has it right, there may in fact be a new page turning for
Mexico. In its “Doing Business 2011” report, where the independent organization
assesses business regulation in 183 economies, Mexico took top honors among its
Latin American peers, placing 35th in the overall global rankings and trouncing
the largest South American economy, Brazil, which fell to 127th place by
comparison. Among the reasons cited for Mexico’s strong showing in the report

small business: latin america’s growth engine | 265


the shift

were its electronic capabilities to simplify the administrative process of starting


up a business, efficiency gains in dealing with construction permits, and favorable
policies that encourage access to credit. The resulting benefits to businesses and
consumers were apparent. Thanks to simplified municipal registration formalities
for firms in Mexico, the number of registered businesses increased by 5%, and
employment rose by 2.8% in affected industries. Moreover, consumers benefited
from the increased competition with an estimated 0.6% reduction in prices.270

If small businesses are the primary source of job creation and economic
development within a country, then providers can tap into the entrepreneurial
spirit of this market with productivity, efficiency, and revenue-generating
opportunities in mind. And, service providers, developers, and advertisers
clearly have a viable role to play as communications services can favor a small
enterprise across all of these business-minded goals. Alcatel-Lucent assessed
the appetite for next-generation communications services and network-based
APIs across 600 small businesses (those with fewer than 100 employees) in
Brazil and Mexico. The results reflect a market with a potential limited only by a
provider’s willingness to understand the challenges of a segment as unique as the
entrepreneurs comprising it and the courage to debunk the myths that otherwise
shackle one’s success in serving small businesses.

Myth: Entrepreneurs are Merely More


Sophisticated Consumers
A common mistake made by providers is to assume that small businesses will
settle for souped-up consumer services. It’s not that providers are naïve. Rather,
many simply lack the scale necessary to offer these entrepreneurs richer services
and support compared with that already provided to the consumer masses. So,
entrepreneurs are often treated with consumer-based services wrapped in a
consumer-based marketing approach. To subject these small businesses to a one-
size-fits-all consumer mindset is not merely as innocuous as failing to tune one’s
marketing efforts; it is a patently offensive and potentially fatal misstep.

Look no further than the blatant differences between consumers and small
businesses in our Latin American study. First, there’s the matter of the optimal

266 | chapter 17
the shift

business model. While consumers in Brazil and Mexico were clear in their
preference for a per-use approach, small businesses in both countries are equally
transparent in their penchant towards a monthly subscription plan.

Next, there’s the issue of bundling. While Mexican consumers were willing to
pay more for services composed of multiple APIs, the opposite is the case for
Mexican small business decision makers, where the general trend is to eschew
complex service definitions and punish providers with a lower willingness to pay.
In contrast, Brazilian consumers preferred simple services over those composed of
multiple APIs where bundling was proven to negatively impact willingness to pay.
Meanwhile, Brazilian small businesses revealed an opposite inclination, where
bundling APIs, in general, results in greater revenue potential to the provider.

Let’s turn our attention to advertising. Like consumers, revenue potential among
small businesses tends to be inversely correlated to advertising impressions within
the service definition, that is, the more ads required by the service, the less the
small business decision maker is willing to pay. But, that’s where the similarities
end. Unlike their consumer counterparts, where targeted advertising ameliorated
an otherwise negative impact to willingness to pay, the opposite is true for small
businesses. The presence of targeted ads among these decision makers can result
in a further hit to a provider or developer’s revenue potential by as much as 21%.

Finally, there’s the issue of what network capabilities are most influential in increasing
a respondent’s willingness to pay. For Brazilian consumers, location APIs were
among the most attractive tested. In contrast, Brazilian small businesses loathed these
capabilities and voted as such with a negative willingness to pay. (Note that this does
not suggest a provider would have to pay these respondents to take the service, but
it does reflect just how unattractive these decision makers find these capabilities as
incorporated in services they may otherwise purchase.) Mexican consumers didn’t
care as much for QoS functionality, in general. In contrast, QoS was one of the
strongest performing API categories among Mexican small businesses, as measured
by their interest and willingness to pay for services that included these capabilities.

In short, there are far more differences than similarities among consumers and
entrepreneurs in these markets. Providers, developers, and advertisers attempting

small business: latin america’s growth engine | 267


the shift

to capture the market with a generic one-size-fits-all approach optimized for


consumers will find themselves marginalized, if not completely dislocated, by
entrepreneurs expecting different strategies.

Myth: Small Businesses Won’t Tolerate Advertising


While many are quick to paint small businesses with a consumer’s broad brush,
they are less inclined to do so when it comes to advertising. Despite the fact that
consumers are inundated with literally thousands of advertisements per day and
often willingly trade their time and attention in exchange for discounted, if not
“free” services, conventional wisdom dismisses the notion that small businesses
would be receptive to the same. In this case, conventional wisdom is wrong. Our
research revealed that small businesses in Latin America are not only receptive
to advertising but potentially attracted to it. In fact, with the right formula,
providers actually stand to earn more revenue from these enterprises through an
advertising-subsidized approach than with no advertising at all.

Specifically, we measured the willingness to pay for services where no advertising


was present. We then measured willingness to pay for the same services subsidized
by advertising through a pricing discount to the respondent. In other words, we
asked these business respondents to consider a scenario whereby their attention
(and that of their employees) is exchanged for a lower retail price—a scenario
similar to the way in which we behave as consumers. In cases where at least a
10% discount is offered over a finite (6 months) or indefinite period of time, the
revenue outlook is more favorable than in a case where no advertising is present.
In other words, the incremental demand from businesses that are willing to accept
this trade (attention in exchange for a lower price point) more than offsets the
price discount. This is a case where a provider stands to make up the pricing
discount in volume and earn even more revenue as a result. Note that we have
not even calculated the incremental revenue provided by advertisers with this
approach, which only offers additional upside for providers and developers.

We also found that small businesses have clear preferences or aversions toward
certain ad formats. We have already covered an aversion to targeted ads.
Beyond the targeting of the message, the media format also has influence over

268 | chapter 17
the shift

the decision maker where a clear preference is revealed for more traditional ad
vehicles. While the presence of video-based banners or advertisements yields
a positive revenue impact of up to 20% for high-frequency impressions, the
exposure of mobile SMS or MMS ads actually decreases revenue potential when
compared with the baseline of a service with no advertising at all. If you assume
small businesses aren’t influenced by ad format, targeting, and frequency, you
will unintentionally leave money on the table.

Myth: Small Businesses Are Prepared to Buy What


They Want
Please do not misunderstand this myth. It’s not that small businesses are confused
as to what they want. In fact, these entrepreneurs are more than capable of
assessing their needs and examining value propositions that resonate. It’s also
not that these small businesses do not have the means to pay for services. In fact,
the willingness to pay among small businesses in Brazil was significantly higher
than what was found in the United States. No, this myth is much more complex
in its meaning. Small businesses know what they want. They have the means to
afford it. They simply lack the ICT know-how to implement the technology
in their business (which, ironically, is also the opportunity that makes these
entrepreneurs so attractive to providers and developers).

Consider this case in point. Small businesses in both Brazil and Mexico favored
services that optimized meetings or fostered more seamless communications
between employees—so much so, in fact, that these services were among the
top out of 13 tested in terms of willingness to pay. This finding is not surprising
when one considers that these Latin American businesses agreed that reducing
operational expenses earned its place among the three most cited determinants
in influencing resource allocation from a list of ten possible factors. While the
need is clear, and the want for value propositions that make employees more
efficient follows, the ability for these entrepreneurs to use these services is less
certain. Since these services rely on knowing employees’ presence and location
information to seamlessly connect them to others, making employees aware that
their real-time context is fair game may require company policies stating the same.
And this is where the disconnect between the services a small business decision

small business: latin america’s growth engine | 269


the shift

maker wants and those that are readily implementable becomes problematic.
Only three in five Brazilian small businesses have policies that provide for some
type of employee monitoring in place, with fewer than half agreeing that such
policies are sufficient in protecting employee privacy concerns. In Mexico, the
situation is even worse, with about a third indicating that such policies exist but
only a quarter agreeing they are adequate in addressing employee privacy rights.
Service providers or developers attempting to introduce contextually based
services that rely on real-time knowledge of employees’ presence and location
may discover a bit of a schizophrenic market, one where demand clearly exists
but practical implementation requirements are lacking.

Myth: Small Businesses Will Defect for Lower Prices


Small businesses certainly appreciate the value of currency. In a global market
plagued by one of the worst recessions in our lifetime, this point is amplified.
However, it is erroneous to believe that small businesses automatically equate
price with value, yet alone that they are likely to defect from a provider merely
to save a buck. In Latin America, the loyalty to one’s incumbent provider is
even stronger among small businesses than what exists in the United States.
Specifically, when asked how much more likely they would be to remain with
a provider that offered their favorite application of the thirteen tested, nearly
90% of Latin American small businesses indicated they would be somewhat or
much more likely to stay loyal for 12 months. In contrast, only half of the US
small business decision makers felt the same.

Despite loyalty to an incumbent provider that delivers relevant services, small


businesses in Brazil do see things a bit differently than either their Mexican
or US counterparts. That is, Brazilians are roughly split in their preference
regarding which type of company—a service provider or an application
developer—they would be most inclined to buy the service from. In contrast,
service providers drew nearly two-thirds of the preference votes among US and
Mexican small business decision makers. And, further debunking this myth,
price appears to have little influence over the preference for a particular type of
provider among Brazilian small businesses. In fact, incumbent service providers
were perceived as having a favorable pricing position compared with popular

270 | chapter 17
the shift

enterprise developer brands that were also tested. Where these developers
narrowed the perceptual gap was in the delivery of high-quality products and
services backed by superior support.

To this point, not only do businesses value support in selecting a brand with
which to do business, they are also willing to pay more for it. For instance,
although nearly half of Latin American small businesses favor a provider because
of a favorable pricing model, over 40% are also likely to prefer a partner who
offers QoS guarantees. In fact, when we tested the impact of various support
options on a respondent’s willingness to pay, Brazilian entrepreneurs were most
influenced by comprehensive support packages with IT help desk capabilities.
In Mexico, the influence of support on willingness to pay was even stronger,
despite a more price-sensitive market compared with that of Brazil, with
Mexican small businesses demonstrating a significant willingness to pay for
comprehensive support options and enhanced network security (a phenomenon
also recognized among Mexican consumers and reflective of the current safety-
conscious mindset of the market).

This isn’t to suggest that entrepreneurs are somehow immune to the basic
laws of supply and demand. Of course price has a bearing on take rates for
services (as we discussed earlier with the elastic demand curve discovered for
advertising-subsidized services). However, small businesses deserve more credit
for their business sense. In Brazil, productivity enhancements and operational
efficiencies are most important to these entrepreneurs, with approximately 40%
agreeing that these needs are most essential in determining resource allocation.
In Mexico, the situation is a bit different. Here, the absolute top requirement
out of ten tested was in opening up new market opportunities. Nearly 50% of
Mexican entrepreneurs agreed that this was the most important determinant in
influencing resource allocation. This definitely aligns with a culture that embraces
new business ventures as identified by the World Bank. In either Mexico or
Brazil, the latent motivations driving demand reflect business imperatives, not
price. Linking one’s value proposition to benefits in productivity, customer
service, or revenue attainment will find a market primed to respond.

small business: latin america’s growth engine | 271


the shift

Putting It All Together


Small business is big business in Latin America. As Mexico has realized, creating
an environment that favors business entry increases competition, creates jobs,
and buoys the economy. Service providers and developers looking to capitalize
on this growth must first avoid the missteps that are unfortunately all too
commonplace when serving this complex market. Among the do’s and don’ts
are the following:

> Do recognize the clear preference for a monthly billing option that
clearly distinguishes these entrepreneurs from their Latin American
consumer counterparts.
> Don’t suboptimize revenue potential with overcomplicated services. While
Brazilian businesses are more receptive to services that bundle multiple
APIs, Mexican businesses respond with a lower willingness to pay.
> Don’t get the advertising equation wrong. Small businesses are receptive
to advertising, particularly when considering the cost benefits they
derive with subsidized services. However, this is a case where targeted
advertising suppresses revenue potential. And, there are clear preferences
for video-based advertisements in lieu of mobile advertising options,
which are met with lower appetite and revenue potential.
> Don’t underestimate the challenges these entrepreneurs will face in
introducing services that rely on employees’ real-time context, such as
presence or location. While these decision makers prefer and are willing
to pay for services that incorporate this intelligence, the majority are not
equipped to address employee privacy concerns with current company
policies. Providers and developers attempting to introduce these
capabilities may find friction in the market until such policies are more
widely adopted.
> Do give credit to these entrepreneurs for their business sense. While
the law of supply and demand is still in play, these decision makers are
not solely influenced by price. In fact, brand loyalty is closely associated
with superior products, services, and support. Beyond remaining loyal
to providers who offer the same, these businesses are willing to pay
for services that address their imperatives of improving productivity,
increasing efficiency, and unlocking revenue opportunities.

272 | chapter 17
the shift

A thriving private sector lifts more than a local or national economy. It creates
an environment where jobs are created, entrepreneurs are rewarded, and citizens
benefit from increased competition. And, while Mexico and Brazil represent
the largest economies within Latin America, the opportunity for prosperity
rests, at least in part, on their ability to sustain private sector growth. This
transformation further requires a communications infrastructure wrapped in
services and support that adapt to the business challenges of a 2.0 landscape.

Perhaps Hanson is correct in expecting more from a country that has endured
its fair share of reform. Or, perhaps the true mettle of a country will rest in its
ability to propel itself forward with a framework that attracts and inspires an
entrepreneurial spirit. For Brazil and Mexico, your time has come. And, for those
providers and developers serving small businesses in these emerging economies,
your market is waiting.

small business: latin america’s growth engine | 273


the shift

274 | chapter 17
the shift

devel-
chapter 18

opers
brazil’s
emerging
market

developers: brazil’s emerging market | 275


the shift

Key Chapter Highlights


A developer is born in Latin America every 5
minutes, giving the region the second highest
growth rate for developers in the world, behind only
the Asia Pacific.

Brazilian developers in an Alcatel-Lucent primary


research study demonstrated a greater interest
in network-based APIs than their American
counterparts.

Time remains the intangible currency that unites


all developers across the globe. Like their US
counterparts, Brazilian developers agreed that
APIs reduce the time associated with creating
applications and were willing to pay a premium for
bundles composed of multiple APIs as a result.

Support options are also valued by developers,


who are willing to pay more for customer service
and billing capabilities. However, as was the case
in North America, these developers prize their
community and do not expect, or want, premium
support options to supplant their peer forums.

Discoverability, not reach, is what matters. Brazilian


developers were strongly attracted to marketing
options that increased their chances of breaking
through the cluttered application marketplace, with
the vast majority willing to trade exclusivity with a
provider for greater discoverability benefits.

276 | chapter 18
the shift

> Brazil is a market ripe for development. It recently


earned its place as the most attractive market (tied with China) in a survey
among Bloomberg investors, analysts, and traders, trouncing the United States,
which came in fourth place by comparison.271 It boasts the world’s eighth largest
economy and, as measured by purchasing power, is second only to the United
States in the Americas.272 And, its inclusion in the BRIC block (composed of
Brazil, Russia, India, and China) keeps it in company with emerging markets
that collectively represent the fourth largest economy worldwide.273

But we’re not simply speaking of a market primed for economic development.
As authors of this book, our primary interest is in the pent up demand for
“development” of a different kind—applications development. If you’re quick to
assume Brazil is a country without the means to afford the high-tech gadgets and
services popular in the United States and other developed nations, consider the
following facts. Brazil has more mobile phones per inhabitant than the United
States.274 Brazilians who have access to computers spend 30 hours per week on
the Internet—more than the 17 hours per week they spend watching television
by comparison.275 They are rabid social networkers, with 86% of the Brazilian
online population regularly using social networking sites, making it the top
country worldwide in this pursuit.276 A survey by Deloitte in early 2010 across

developers: brazil’s emerging market | 277


the shift

seven countries including the United States, Germany, Japan, and India found
Brazilian consumers to be the most committed to acquiring new technology
products the moment they are introduced.277 Perhaps this craving helps explain
Apple’s recent success with its iPad launch in the country, with the device selling
at up to $1,500 due to the tariffs imposed on imported electronic devices.278
And, despite the scarcity of other Apple products in the country, that hasn’t
deterred Brazilians from paying two to three times the manufacturer’s suggested
price on the black market to satiate their appetite for the latest technology.279

The market potential for information technology across all segments of customers—
consumers and enterprises—places Brazil near the top of the emerging market
heap. Gartner recently predicted that IT spending among end users in Brazil
will reach $134.2 billion in 2014, up from $101.3 billion in 2010. The current
threshold of spending represents 9.6% of the country’s real GDP, placing it above
the 6.1% ratio for the BRIC block. Further, this places Brazil as the second largest
IT market among emerging economies after China. That translates to an IT spend
that is currently more than double that of Russia and 33% more than India’s.280

Perhaps this growth helps explain an equally burgeoning market of application


developers in Latin America. The region represents roughly 9% of the global
developer population worldwide. Though this currently ranks it last against its
global peers, ignore this developer market at your own risk. Evans predicts the
developer population will grow by 8% in Latin America annually, second only
to Asia Pacific’s growth rate of 8.3% and over four times the growth rate of the
North American developer market.281

We’ve covered the appetite for network capabilities across 1,300 commercial
developers in North America. We were curious if commercial developers in Brazil
would be equally attracted to these network APIs. Therefore, we expanded the scope
of our study to include 300 commercial developers in Brazil. We put these developers
through the same paces as we did their North American counterparts. We tested the
willingness to pay for several network-based APIs and various go-to-market support
options that could be offered by a provider. The results prove these developers are
more similar to their North American brethren than they are different.

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the shift

Time is the Intangible Currency


Brazilian developers do not exactly share the appetite for network-based
APIs as expressed by their US peers. In fact, they exceed it. While 39% of US
developers were very likely to use the top-performing network-based API if it
were made available to them, the figure jumps to 59% of Brazilian developers
expressing the same inclination. For the least popular network API, still over
one in three Brazilian developers indicated they would be very likely to use it if
it were available. That’s quite an appetite for a developer community with hardly
a shortage of APIs readily available to them. It accentuates the points made in
the earlier developer chapters: Developers value functionality and are willing to
pay for it.

Further, the types of APIs that were more popular, as expressed by a likelihood
to use them if available, are surprisingly similar in both the United States and
Brazil. Tied for first place among both developer communities were:

> A security API that establishes and maintains an authenticated


connection for a single session across multiple devices and/or networks
> The ever-popular messaging API that allows for seamless SMS, MMS,
IM, and email messaging optimally formatted and distributed to a
recipient based on the most accessible device. This is the same API that
attained top honors among commercial and enterprise developers in
the United States and now is shown to be even more popular among
Brazilian commercial developers.

Further, among all network-based APIs tested in both the United States and
Brazil, all commanded a positive willingness to pay among developers. Skeptics
reading this may still question why developers would see value in APIs in a market
characterized by thousands of APIs across web and device environments. We
would submit it is precisely this abundance of APIs that makes network-based
APIs attractive. Developers are faced with thousands of device environments,
hundreds of network alternatives, and several operating system choices. This
fragmentation in the market creates an appetite and willingness to pay for
functionality that is agnostic to device, operating system, and network. In short,
as we have discussed, the commercial developer’s intangible currency is time.

developers: brazil’s emerging market | 279


the shift

Find a way to crash the development cycle and help a developer accelerate the
revenue path and you will find a market willing and able to pay.

Still not convinced? You may recall the Commercial Developer’s Hierarchy
of Needs that we introduced in Chapter 5. Quite simply, this represented
the statistical analysis of thousands of trade-offs made by North American
developers across a variety of attributes, including API functionality and go-
to-market support options. Those attributes that were most important to
influencing a developer’s willingness to pay were reflected as the most primal
needs (such as the functionality of the network API, which alone had the most
significant impact on demand among North American developers). While we
demonstrated that bundling APIs had a greater impact on willingness to pay
among North American developers than price itself, the effect was even stronger
in Brazil. In fact, the bundle configuration alone had the most significant impact
on a Brazilian developer’s willingness to pay. The revenue potential of bundling
two APIs together earns a provider up to 80% more revenue than offering two
APIs discretely. Why? A bundle of capabilities allows the developer to use the
same tools to create an application. Further, rather than having to scour the
thousands of APIs available in the market today for those with complementary
functionality (such as presence and location, for example) and then stitching
together those APIs with disjointed software development kits and testing and
certification requirements, developers can instead gain value with a bundle of
capabilities that, when combined, create a more powerful product that can be
developed in less time. Corroborating the importance of time to a developer,
when we asked Brazilian developers for the top three benefits third-party APIs
afford, reducing the length of time needed to create new applications was the top
choice cited among eight possibilities—selected by 52% of Brazilian developers.

Support is the Unaddressed Need


If time is the intangible currency, then every second attempting to troubleshoot
an application that isn’t performing up to par results in lost productivity for a
developer. Perhaps that helps explain why Brazilian developers evaluated an API
that identifies and troubleshoots problems associated with installation issues,
latency problems, and network traffic conditions for an application as one of the

280 | chapter 18
the shift

most attractive in terms of willingness to pay. Today, if an application still isn’t


working up to snuff, particularly in an Open Source environment, developers
must rely solely on the support of their peer community to troubleshoot and
resolve the problem. As we mentioned in the earlier developer chapters, the role
of community cannot be understated. Developers are not seeking an alternative
to supplant the support provided by their peers. However, they are interested
in—and willing to pay for—support that can pick up where these forums may
leave off. And, for providers who are accustomed to a world where “support”
translates to onerous service level commitments and 24x7 live service, the
findings in Brazil are as encouraging as those found in North America. That is,
the incremental willingness to pay associated with these more costly support
options does not likely offset the associated cost in providing them. For these
developers who have acted as architects of the 2.0 world in which they live, they
understandably demonstrate a relatively healthy willingness to pay for lower-
cost support options, such as email and moderated forums.

Beyond “traditional” support, developers are keen to accept services that help
them monetize their applications. Take the all-important billing engine as one
example. Nearly half of Brazilian developers use micropayments and 40% who
do not are interested in doing so. Of these developers interested in and using
micropayments, they expect revenue derived from that source to grow. As such,
billing is and will continue to be a critical requirement for a developer. While
this may seem obvious, the potential for billing as a revenue platform could
mean big business to a provider. Take PayPal as the most obvious success case.
It accounted for 37% of eBay’s overall revenue in the third quarter of 2010
compared with 23% just 5 years ago. eBay’s payments division, which consists
largely of PayPal, took in $838 million in revenue in the third quarter, up 22% in
a year. The primary core of eBay’s auction operations collected $1.41 billion in
revenue during the same period, an increase of just 3%.282

Indeed, the potential micropayment market has captured the interest of more
than just PayPal, which has cited mobile as one of its key growth opportunities.283
AT&T, T-Mobile, and Verizon announced a joint venture called Isis, which will
use near-field communications to recognize payment through a consumer’s
mobile device. Google has also demonstrated how phones with a new version of

developers: brazil’s emerging market | 281


the shift

its Android system could do the same. And, in an attempt to capture its share of
Gartner’s estimated $6.2 billion mobile applications market, Apple has recently
hired an expert in near-field communication technology as its new product
manager for mobile commerce.284

Accordingly, there is commensurate appetite for the capability to charge fees


to an end user through the service provider’s billing platform as measured
by willingness to pay among Brazilian developers. But the interest doesn’t
stop there. As we saw in North America, there is even higher interest and
willingness to pay for network-based intelligence that helps the developer
determine the optimal price point for an application. As we mentioned in the
previous developer chapters, commercial developers are often creators first,
businesspeople by necessity. Perhaps that helps explain why again we see a market
receptive to appropriately priced per-dip models when compared with revenue-
sharing alternatives, with providers having the opportunity to gain six times the
revenue potential for the former. In other words, simply by changing the type of
business model offered—from revenue-sharing to per-dip—a provider stands to
earn several orders of magnitude more in revenue potential without deterring
developer participation as a result. Does this mean that developer demand for
APIs is really that inelastic, that they will incur what would amount to a six-fold
pricing increase for the same API without decreasing demand? We think not.
But, what the picture does reflect is a situation where developers gravitate first to
the bundle and functionality of APIs before considering the business case basics
of profit and loss. And, this is further evidence that these developers not only
want but need intelligence-based tools to address this blind spot.

Discoverability is the Desire


We covered the point of reach being the least important variable in influencing
developer willingness to pay in North America. The sentiment is shared by their
Brazilian counterparts. Not only is reach the least likely to affect willingness to
pay, a significant minority of Brazilian developers—35%—would actually prefer
to work with a regionally focused provider versus a large national alternative.
And, for service providers of all sizes, the news is even better. Brazilian developers
are equally likely to prefer a network provider to a software company or device

282 | chapter 18
the shift

manufacturer when considering with whom they would most like to work. The
fact that these latter companies often have a large “reach” of customers that
consume applications demonstrates how insignificant this criterion is relative to
other factors in a developer’s decision.

This may seem counterintuitive. After all, why wouldn’t a developer want
a larger audience? All else being equal, they would. However, when asked to
make difficult trade-offs that are more emulative of real market scenarios, reach
is not as important. To the extent developers express an overt desire for reach,
we would submit the underlying motivation rests in the time currency we have
cited. That is, if I can develop an application once and simultaneously reach more
potential customers, then I have made more productive use of my scarce time. It’s
the same reason developers in our study that preferred Google as a partner were
likely to cite its large number of customers as a reason. It speaks to why nearly
half of Brazilian developers were willing to accept up to a 30% premium over
traditional API prices to work with a carrier-agnostic aggregator that exposes
APIs across multiple service provider networks. A developer’s expressed interest
in reach reveals a latent need for time. And, this need can be satisfied with
more attractive approaches, such as creative bundling options, which alone can
neutralize a perceived reach advantage by a larger provider.

Developers desire discoverability, not reach. Further to this point, we asked these
developers how likely they would be to offer a minimum of 6 months exclusivity
for their application with a provider in exchange for greater discoverability
in the provider’s storefront. Over 80% of developers would be somewhat or
much more likely to agree to a term of exclusivity if a provider were to offer
optimal search or storefront placement. This is yet one more example of trading
off greater “reach” by limiting one’s application to a particular storefront for
enhanced “discoverability” on the same.

Putting It All Together


Brazil is an emerging market in many ways. Its citizens are avid consumers of
technology. Its economy is poised for growth. And, its developer community is
growing faster than most with an appetite that exceeds that of the United States.

developers: brazil’s emerging market | 283


the shift

For providers seeking to tap into this market, remember the following:

> Time is the intangible currency. These developers were most influenced
by bundle configurations of APIs in the impact on willngness to pay.
Further, these developers responded very favorably to diagnostic QoS
capabilities that identify and troubleshoot application performance
problems across an end-to-end network.
> These developers are far more like their US counterparts than they are
different. That said, they have a bigger appetite and greater willingness
to pay for network-based APIs. In particular, they were more likely to
gravitate to QoS and storage capabilities than US developers.
> Support options are a fundamental need. Whether this translates into
leveraging a service provider’s billing platform for micropayments,
using network-based intelligence to identify the optimal price point for
an application, or seeking intervention when peer-based forums fail,
providers have an opportunity to earn incremental revenue with each of
these approaches.
> Discoverability, not reach, is the latent desire. Do not conflate the two.
Offering developers greater discoverability capabilities, such as enhanced
storefront position or search placement, is sufficient to earn exclusivity
for an attractive application.

The United States and Brazil are definitely distinct markets. One is developed
while the other is emerging. One struggles with recession while the other stands
at the precipice of economic hope. One has a significant developer community,
while the other is burgeoning. Yet, despite these differences, the similarities
across these developer communities could not be more apparent. They share the
same intangible currency. They crave support. They want discoverability. They
are willing and able to pay for network-based APIs. These similarities represent
a good-news market for service providers. A virtual world knows no geographic
boundaries. And, since developers are more alike than they are different, a service
provider’s potential to attract these creators reaches far beyond its local or national
jurisdiction. Indeed, the market potential is now as global as a provider desires.

284 | chapter 18
the shift

epilogue
The evolved
value chain in a

2.0
world
epilogue | 285
the shift

286 | epilogue
the shift

> Now that we have explored multiple aspects of the


evolving 2.0 value chain, let’s take a moment to recap the key findings based on
thousands of surveys administered across this complex ecosystem:

> The current 2.0 business models are unstable and in need of
transformation. Whether looking at network providers attempting to
keep pace with a seemingly insatiable consumer broadband appetite,
content providers hoping to stem the tide of future video cord-cutters or
advertisers seeking to evolve archaic “spray-and-pray” delivery models,
the shifting sands in our landscape are evident. It’s time to augment
traditional business models with new value chains that can be supported
in a thriving ecosystem.
> This is not about a zero-sum game. Instead, this is about exploring
options that enable multiple parties in the market to thrive. To do so,
incremental value must be created and sustained across the ecosystem.
> Leveraging the network as a development platform—what we have called
Application Enablement—allows developers to tap into new capabilities
while addressing the fragmentation associated with thousands of
devices, networks, and app stores. Developers have an interest in and
willingness to pay for these network capabilities. Bundling these APIs

epilogue | 287
the shift

288 | epilogue
the shift

results in even greater revenue potential for a provider. Finally, these


developers do not conflate reach with discoverability. They are in need of
marketing support, including diagnostic tools and marketability of their
applications, and are willing to pay for such.
> All consumer groups—including gamers, social networkers, online
video enthusiasts, and connected parents across North and Latin
America—see a value in network-based capabilities. They are willing to
pay more for services when such network ingredients are incorporated.
However, there is not a one-size-fits-all billing approach for these
users in North America—with video enthusiasts preferring monthly
subscription fees, social networkers having a penchant for pay-per-use
charges and gamers possessing an aversion to one-time fees. While
per-use models clearly won favor among Mexico and Brazil consumers,
the willingness to pay for specific network functionality is as different
as the current sociopolitical landscapes in these countries. Further,
consumers in each country expressed a different appetite for bundled
APIs operating within a service definition, with Mexicans favoring
such an approach (like their North American counterparts) and
Brazilians eschewing it. Service providers that aggregate consumer
profile data and provide such intelligence to developers address the
natural fragmentation in markets across North and Latin America and
maximize revenues. Combine this aggregated profiling data with the
ability to allow a developer to charge micropayments directly to the
end user’s communications bill and you have another win-win-win
in the market: Developers receive seamless billing, users leverage the
secure billing relationship already in place with their providers, and
operators insert themselves into a new value chain.
> Enterprise users are more complex in their assessment of capabilities.
Some segments view a few APIs so negatively, their inclusion in a bundle
can actually serve to decrease willingness to pay. While bundling is a clear
winner among developers and most consumers, it is less of a sure thing
among enterprise users. Depending on the configuration and segment,
bundling can serve to either increase or decrease revenue potential.
> Advertisers face an increasingly fragmented market as well. They crave
simplicity and performance metrics. Providers offering up profiling data

epilogue | 289
the shift

for end users can find themselves in an interesting position to monetize


this information. However, providers must first earn and then keep the
trust of users in an attempt to do so. Users must remain in control of
their profiling data—including over who has access to such information
and when it is made available to them. Consumers are more likely to
trust their service provider over their application developer with this
sensitive data. Further, both enterprises and consumers in the US are
highly tolerant to high-frequency ad models as part of their service
definitions. It seems US service providers are in the catbird seat with
regards to monetizing the profiles of a trusting and advertising-tolerant
user base—among both enterprises and consumers.

Undoubtedly, there are still critics who are not convinced service providers have
a right to play in this space. Among the possible objections:

> Service providers are not relevant to developers. True, though this
landscape is changing, the point is valid. Service providers must consider
developers an extension of their market and must be primed to support
them. Otherwise, they should turn to aggregators that are capable of
attracting this market and sell through their capabilities accordingly. In
either case, developers are a critical part of the ecosystem that will require
their own resources for marketing and support. Providers cannot expect
to merely expose APIs and walk away. Cultivating the market is even
more important and will require dedicated effort on the part of providers
or through the aggregators that serve developers.
> Developers will not abandon popular devices like the iPhone and
Android family. True. We would never suggest this is an either/or
option (either develop for devices or for the network providers). Instead,
network capabilities will simply provide developers with additional
options should they want to address multiple devices and operating
systems concurrently. In fact, bundles of network, device, and Web
APIs could be combined to offer the development community greater
simplicity in the development cycle while maximizing the performance
capabilities of their applications.

290 | epilogue
the shift

> Regulators will intervene. This one remains to be seen. Certainly,


there are heated debates underway pertaining to Net Neutrality and
the reclassification of broadband services. Regulators will always have
a significant role to play in this market. However, depending on how
capabilities are exposed and to what extent broadband innovation is
supported, the regulatory impacts are uncertain.
> Consumer watchdog groups will question privacy concerns. True. This is
precisely why we submit that consumers must remain in control of their
privacy settings at all times. This is not a case for an opt-out approach.
Consumers must directly and transparently opt in whenever they choose
to share information about themselves (and, more importantly, when
they choose not to).

While it might be dangerous to estimate the market potential of such a vibrant


value chain, we’re not sheepish to do so, given our research and analysis.
Assuming network providers were to open up these capabilities, we estimate a
$100 billion market opportunity in the United States alone. Now, to be clear,
network providers will be competing against Web and device alternatives that
will continue to innovate in emulating comparable capabilities.

The race has started. We will continue to analyze and report ongoing shifts in
this value chain on our blog at www.theshiftonline.com. This story does not
end with this book, nor should the dialogue. We will keep our eyes open for
supporting or contradicting evidence that corroborates our arguments or points
to new shifts in the environment.

While many service providers watch from the sidelines, this game continues to
evolve. Whether you agree with our arguments or not, one matter is not up for
debate: A 2.0 world requires 2.0 business models. Opportunistic players will
either find ways to innovate and remain relevant in their value chain or find
themselves commoditized or extinguished as a result. For those seeking to play
in this dynamic ecosystem, the choice is now yours.

epilogue | 291
the shift

292 | epilogue
the shift

references

references | 293
the shift

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http://www.variety.com/index.asp?layout=print_story&articleid=VR111801298
4&categoryid=-1 .
85. Paul Farhi, “Click, Change,” The Washington Post, May 17, 2009,
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/14/
AR2009051404522_pf.html .
86. The Battle for the North American (US/Canada) Couch Potato: New Challenges and
Opportunities in the Content Market, The Convergence Consulting Group, April 2010,
http://www.convergenceonline.com/downloads/NAMNewContent2010.pdf
87. “Television, Internet and Mobile Usage in the U.S.,” Nielsen, December 18, 2009,
http://blog.nielsen.com/nielsenwire/wp-content/uploads/2009/09/
ThreeScreenReport_US_2Q09REV.pdf .
88. James McQuivey, “Google TV Is A Bigger Deal Than You Think,” Forrester
Research Blog, June 10, 2010, http://blogs.forrester.com/james_mcquivey/10-06-
10-google_tv_bigger_deal_you_think .
89. The Battle for the North American Couch Potato, The Convergence Consulting Group.
90. Stuart Elliott, “Marketers Welcome Television’s Shift to a 52-Week Season,” The New
York Times, May 12, 2008, http://www.nytimes.com/2008/05/12/business/
media/12adcol.html .
91. Farhi, ”Click, Change.”
92. Ibid.
93. Ronald Gover, Tom Lowry, and Cliff Edwards, “Revenge of the Cable Guys,”
Business Week, March 22–29, 2010.

300 | references
the shift

94. Lynette Rice, “‘In the Motherhood’: Thanks, but no thanks, for your ideas,
mommies!” EW.com, March 25, 2009, http://insidetv.ew.com/2009/03/25/in-
the-mother-1/ .
95. Clay Shirky, “The Collapse of Complex Business Models,” April 2010,
http://www.shirky.com/weblog/2010/04/the-collapse-of-complex-business-
models/ .
96. Michael Greeson, “Profiling Online Video Viewers,” GigaOM Pro, April 5, 2010,
http://pro.gigaom.com/2010/04/survey-who-are-those-masked-online-video-
viewers/ .
97. Littleton, “Biz Sees Decade of Tumult.”
98. Nellie Andreeva, “Development Wheels Coming Off,” Hollywood Reporter,
December 17, 2007.
99. Andreeva, 2007.
100. Bill Carter, “Weighty Dramas Flourish on Cable,” The New York Times, April 4, 2010,
http://www.nytimes.com/2010/04/05/business/media/05cable.html .
101. Roettgers, “Hulu Brings in the Dough.”
102. Kit Eaton, “Repackaging TV: How Hulu Turns a Profit,” FastCompany.com, July 16,
2010, http://www.fastcompany.com/1670893/hulu-plans-ipo-but-where-in-finances-
does-cash-income
103. Roettgers, “Hulu Brings in the Dough.”
104. Wayne Friedman, “NBC: Revs Up, Profits Down, Cable Nets Money Spinners,”
MediaDailyNews, April 19, 2010, http://www.mediapost.com/publications/?art_
aid=126319&fa=Articles.showArticle .
105. Ryan Nakishima, “Despite Declining Share of Profits, TV Networks Bet More on
Programs,” Washington Examiner, June 2, 2010.
106. Nellie Andreeva, “More Retrans Disputes on Horizon,” Hollywood Reporter,
January 3, 2010.
107. Nakishima, “Despite Declining Share of Profits.”
108. Shirky, “The Collapse of Complex Business Models.”
109. Paul Sweeting, “TV Apps: Evolution from Novelty to Mainstream,” GigaOM Pro,
May 17, 2010, http://pro.gigaom.com/2010/05/tv-apps-evolution-from-novelty-to-
mainstream/ .
110. Tom Simonite, “Yahoo Brings Apps to TVs,” Technology Review, September 15,
2010, http://www.technologyreview.com/communications/26295/?a=f .

references | 301
the shift

111. Ibid.
112. “Netflix Uses 20% of US Internet Bandwidth,” The Online Reporter, October 29, 2010.
113. Liesdamnliesandstatistics.com, September 24, 2010.
114. Brian Stelter, “Netflix to Pay Nearly $1 Billion to Add Films to On-Demand Service,“
The New York Times, August 10, 2010, http://www.nytimes.com/2010/08/11/
business/media/11netflix.html?src=busln .
115. “Connected Consumer Market Overview, Q1 2010,” GigaOM Pro,
http://pro.gigaom.com/2010/04/connected-consumer-market-overview-q1-2010/ .
116 Brad Stone, “Calling on Sony and Others, Google Makes a TV Move,” The New York
Times, May 20, 2010, http://www.nytimes.com/2010/05/21/technology/21google.
html .
117. O’Neill, Jim, “Sony cuts Google TV price $100; trouble in paradise for smart TV
play?” FierceIPTV, November 29, 2010, http://www.fierceiptv.com/story/sony-
cuts-google-tv-price-100-trouble-paradise-smart-tv-play/2010-11-29 .
118. Jim O’Neill, “Google TV, price cuts and slow retail sales; what’s its future?,”
FierceOnlineVideo, December 1, 2010, http://www.fierceonlinevideo.com/story/
google-tv-price-cuts-and-slow-retail-sales-whats-its-future/2010-12-01 .
119. Cory Treffiletti, “Upfronts? We’re Talking About Upfronts?” Online Spin,
June 9, 2010, http://www.mediapost.com/publications/index.cfm?fa=Articles.
showArticle&art_aid=129787&passFuseAction=PublicationsSearch.
showSearchReslts&art_searched=tv%20upfronts&page_number=0 .
120. Paul Sweeting, “Google TV: Overview and Strategic Analysis,” GigaOM Pro, May 27,
2010, http://pro.gigaom.com/2010/05/google-tv-strategic-analysis/ .
121. Matt Burns, “Amazon Unveils $.99 Fox And ABC TV Show Purchases. Apple
Fanboys say wha?” CrunchGear, September 1, 2010, http://www.crunchgear.
com/2010/09/01/amazon-unveils-99-fox-and-abc-tv-show-rentals-apple-fanboys-
say-wha/ .
122. Paul Sweeting, “Apple’s Path to the Living Room,” GigaOM Pro, July 15, 2010,
http://pro.gigaom.com/2010/07/apples-path-to-the-living-room/ .
123. Ibid.
124. Ibid.
125. Pete Cashmore, “Why It’s Prime Time for Apple TV,” CNN.com, June 4, 2010.
126. “The comScore Data Passport: First Half 2010.”

302 | references
the shift

127. “The comScore Data Passport: Second Half 2010,” comScore, September 20, 2010,
http://www.comscore.com/Press_Events/Presentations_Whitepapers/2010/
comScore_Data_Passport_-_Second_Half_2010 .
128. Jay Yarow and Kamelia Angelova, “CHART OF THE DAY: Facebook Passes Google
In Time Spent On Site For First Time Ever,” Business Insider, September, 9, 2010,
http://www.businessinsider.com/chart-of-the-day-time-facebook-google-
yahoo-2010-9 .
129. Jon Gibs, “Social Media: The Next Great Wave for Content Discovery,”
nielsenwire, October 5, 2009..
130. Ibid.
131. Om Malik, “Why Google Should Fear the Social Web,” GigaOM Pro, October 29, 2009,
http://pro.gigaom.com/2009/10/why-google-should-fear-the-social-web/ .
132. Jones, “Mobile Search.”
133. “Global Advertising: Consumers Trust Real Friends and Virtual Strangers the
Most,” nielsenwire, July 7, 2009, http://blog.nielsen.com/nielsenwire/consumer/
global-advertising-consumers-trust-real-friends-and-virtual-strangers-the-most .
134. “Boomers and Technology,” AARP and Microsoft.
135. John Goalby, “Twitter destined to replace Google Search,” Twitip.com,
http://www.twitip.com/twitter-destined-to-replace-google-search/ .
136. Jason Kincaid, “The Facebook Privacy Fiasco Begins,” TechCrunch, December 9,
2009, http://techcrunch.com/2009/12/09/facebook-privacy/ .
137. Mary Madden and Aaron Smith, “Reputation Management and Social
Networking,” Pew Internet & American Life Project, May 26, 2010,
http://pewinternet.org/Reports/2010/Reputation-Management/Introduction.
aspx?r=1 (accessed June 14, 2010).
138. “2009 Study: Consumer Attitudes about Behavioral Targeting,” TRUST
e-sponsored survey conducted by TNS, March 4, 2009.
139. Diaspora home page, June 14, 2010, http://www.joindiaspora.com/ .
140. Jim Nichols, “Social Media: The next generation,” iMediaConnection, June 10,
2010, http://www.imediaconnection.com/printpage/printpage.aspx?id=26912 .
141. 2010 Social Gaming Research, Information Solutions Group, January 2010,
http://www.infosolutionsgroup.com/2010_PopCap_Social_Gaming_Research_
Results.pdf .

references | 303
the shift

142. Elizabeth Harz, Electronic Arts Keynote, Mobile Marketing Forum, New York,
June 9, 2010.
143. “A Brief History of Game Console Warfare,” Business Week, October 16, 2006.
144. “2009 U.S. Video Game Industry and PC Game Software Retail Sales Reach $20.2
Billion,” The NPD Group, Inc., press release, January 14, 2010, http://www.npd.
com/press/releases/press_100114.html .
145. Ibid.
146. Barb Dybwad, “Portable Gaming: Can Apple Take Down Nintendo and Sony?”
Mashable.com, September 9, 2009, http://mashable.com/2009/09/09/apple-
portable-gaming/ .
147. “AdMob Mobile Metrics Report.”
148. Joshua Topolsky, “The next Apple TV revealed: cloud storage and iPhone OS
on tap...and a $99 price tag,” engadget, May 28, 2010, http://www.engadget.
com/2010/05/28/the-next-apple-tv-revealed-cloud-storage-and-iphone-os-on-
tap/ .
149. Hiroko Tabuchi, “Apple’s Shadow Hangs over Game Console Makers,” The New York
Times, September 26, 2009.
150. Daniel Terdiman, “At GDC, iPhone game development breaks out,” CNET News,
March 8, 2010, http://news.cnet.com/8301-13772_3-10465246-52.html .
151. The MorningBridge.com, October 13, 2010.
152. “State Of Game Development Survey Reveals iPhone Support Surge, Wii Lull,”
Gamasutra, February 5, 2010, http://www.gamasutra.com/view/news/26846/
State_Of_Game_Development_Survey_Reveals_iPhone_Support_Surge_Wii_
Lull.php .
153. Jared Newman, “Yes, Sony, You Are Competing With the iPhone,” Technologizer,
August 19, 2009, http://technologizer.com/2009/08/19/yes-sony-you-are-
competing-with-the-iphone/ .
154. Wanda Meloni, “The Next Frontier - Female Gaming Demographics,”
Gamasutra, March 30, 2010, http://www.gamasutra.com/blogs/
WandaMeloni/20100330/4812/The_Next_Frontier__Female_Gaming_
Demographics.php?awesm=otf.me_u .
155. Wagner James Au, “Virtual Worlds: Trends and Opportunities,” GigaOM Pro, July 13,
2009, http://pro.gigaom.com/2009/07/virtual-worlds-trends-and-opportunities/ .
156. Michael Dowling, “Social Gaming - the missing link,” SkipLogik, May 13, 2010,
http://skiplogik.com/?p=248 .

304 | references
the shift

157. 2010 Social Gaming Research, Information Solutions Group.


158. Mathew Ingram, “Average Social Gamer Is a 43-Year-Old Woman,” GigaOM,
February 17, 2010, http://gigaom.com/2010/02/17/average-social-gamer-is-a-
43-year-old-woman/ .
159. Lou Kerner, “Zynga $5 Billion Valuation: BUY — Early Leader in Social Gaming
Is Printing Money,” Second Shares, April 6, 2010, http://www.secondshares.com/
2010/04/06/zynga-5-billion-valuation-buy-%E2%80%93-early-leader-in-social-
gaming-is-printing-money/#ixzz0ropJX8XB .
160. “FarmVille nabs inaugural social games award at GDC,” Zynga Blog, April 12,
2010, http://zyngablog.typepad.com/zyngacom/2010/04/farmville-nabs-
inaugural-social-games-award-at-gdc.html .
161. Karen E. Klein, “America’s Love Affair with Small Business,” Bloomberg Businessweek,
June 11, 2010.
162. Ibid.
163. Ibid.
164. “Small Can Be Beautiful in Job Creation,” The Wall Street Journal, December 9, 2010.
165. Olivia Oran, “Intuit: Small Biz Employment Ticking Up,” www.thestreet.com,
November 30, 2010.
166. Scott Shane, “To Encourage Small Business, Learn from Europe,” Bloomberg
Businessweek, December 10, 2010, http://www.businessweek.com/smallbiz/content/
dec2010/sb20101210_839038.htm .
167 Emily Maltby, “Three Best Ways to Expand Overseas,” The Wall Street Journal,
May 28, 2010.
168. “Quicker Employment Recovery Expected Outside Europe and the U.S., NYSE
Euronext Back to Business CEO Survey Reveals,” Yahoo! Canada Finance,
June 10, 2010.
169. Shane, ”To Encourage Small Business.”
170. Angus Loten, “Study: Business IT Spending to Grow,” Inc., August 11, 2008,
http://www.inc.com/news/articles/2008/08/IT-spending.html .
171. Bob Willis, “Small-Business Confidence in US Increased in May (Update 1),”
Bloomberg Businessweek, June 8, 2010.
172. Matthew Sturdevant, “Travelers Study Reveals Small-Business Owners’ Priorities,”
Courant.com blog, June 8, 2010.

references | 305
the shift

173. Symantec, Symantec Global Internet Security Threat Report, Volume XV,
April 2010.
174. Diana Manos, “IT to Play Key Role in Healthcare Change, Leaders Say,” Healthcare IT
News, May 6, 2010.
175. Bernie Monegain, “CIOs Expect Boost in IT Budgets, Staff,” Healthcare IT News,
March 29, 2010.
176. Bernie Monegain, “Nurses Bogged Down in Paperwork,” Healthcare IT News, March
29, 2010.
177. John Morrissey, “Before They Were Famous,” ModernHealthcare.com, June 14, 2010.
178. Besta Shaniker, “Five Ways to Reduce $3.6 Trillion Healthcare Waste in the US,”
International Business Times, June 14, 2010.
179. “Survey: Consumer Support for EHRs Low,” Health Data Management, June 14, 2010.
180. Patty Enrado, “Survey Points to Growing Appeal of PHRs,” Healthcare IT News,
May 6, 2010.
181. Mike Miliard, “Healthcare Data at Risk,” Healthcare IT News, May 6, 2010.
182. Monegain, “CIOs Expect Boost.”
183. Mike Miliard, “Healthcare Top Target for Hackers,” Healthcare IT News, February 24,
2010.
184. Molly Merrill, “Younger Docs EMR Ready,” Healthcare IT News, December 31, 2009.
185. Kyle Hardy, “Telehealth Boosts ICU for Rural Hospitals,” Healthcare IT News, June 2,
2010.
186. “The Doctor is (Plugged) In,” Bloomberg Businessweek, June 26, 2006.
187. Molly Merrill, “iPad can accelerate new era of care,” Healthcare IT News, June 2, 2010.
188. “Digital Monitoring Helps Patients Manage Blood Pressure, Study Says,”
iHealthBeat, May 25, 2010.
189. Enrado, “Survey Points.”
190. “Law Enforcement Needs a Standards-Based Communications Infrastructure,”
Government Technology, May 28, 2010.
191. Shifthappens.wikispace.com.
192. Russell Nichols, “E-Government Score Remains at All-Time High,” Government
Technology, January 26, 2010.
193. Brian Womack, “Facebook Users Help Predict Republican Election-Night
Victories,” Bloomberg, November 3, 2010.

306 | references
the shift

194. Nichols, “E-Government Score.”


195. Karen Wilkinson, “National Crowdsourcing Effort Proves the Value of Sending a Clear
Message,” Government Technology, May 20, 2010.
196. Russell Nichols, “Town Hall Meetings Find New Home, Broader Audience Online,”
Government Technology, April 20, 2010.
197. Russell Nichols, “Survey: Voters See Technology as Cost-Saving Solution for
Governments,” Government Technology, May 26, 2010.
198. Ibid.
199. Nichols, “Town Hall Meetings.”
200. Russell Nichols, “Paper Remains King in the Electronic Age, Study Says,” Government
Technology, June 8, 2010.
201. “Cyber-Security Survey Shows Distrust Between Public and Private Sectors,”
Government Technology, May 3, 2010.
202. “Survey Highlights Federal Government’s Confusion, Distrust in Cloud Computing,”
Government Technology, April 21, 2010.
203. John Tozzi, “Gov 2.0: The Next Internet Boom,” Bloomberg Businessweek, May 27, 2010.
204. “Study: Despite Economic Challenges, IT Spending Still a Key Priority for
Governments,” Government Technology, February 12, 2010.
205. Ibid.
206. Emmeline Zhao, “Demand for Educated Workers May Outstrip Supply by 2018,”
The Wall Street Journal, June 15, 2010.
207. OECD Program for International Student Assessment (PISA) 2006 Results.
208. Stacy Teicher Khadaroo, “Graduation Rate for US High-Schoolers Falls for
Second Straight Year,” Christian Science Monitor, June 10, 2010.
209. Meris Stansbury, “Every Child Needs to Boost Economy,” eSchool News, April 27, 2010.
210. Laura Devaney, “Report Highlights Ed-Tech Lessons from Abroad,” eSchool News,
May 13, 2010.
211. Stansbury, “Every Child.”
212 Teicher Khadaroo, “Graduation Rate.”
213. Andrea Paine, “U.S. Digital Sales ‘to Overtake Physical in 2011,’” Billboard.biz,
June 15, 2010.
214. Dan Moren, “DOJ Looking into iTunes Antitrust Allegations,” Network World,
May 26, 2010.

references | 307
the shift

215. Geoffrey A. Fowler and Jeffrey A. Trachtenberg, “‘Vanity’ Press Goes Digital,”
The Wall Street Journal, June 3, 2010.
216. Lauren Padia and Alex Baumgardner, “Don’t Steal This Video: Internet Piracy Grows,”
Medill Reports: Chicago, June 3, 2010.
217. Ibid.
218. Dennis Carter, “Not Everyone Ready for the Digital Textbook Revolution,”
eCampus News, June 2, 2010.
219. Dennis Carter, “Community Colleges Turn to Online Classes as Enrollments Spike,”
eCampus News, April 16, 2010.
220. Ibid.
221. James Vaznis, “Virtual Schools Soon Reality in Mass.,” The Boston Globe, May 5, 2010.
222. Dennis Pierce, “Survey Reveals Gaps in School Technology Perceptions,” eSchool News,
May 5, 2010.
223. Sharon Jayson, “Are Social Networks Making Students More Narcissistic?”
USA Today, August 25, 2009.
224. Donald Bell, “Can Apps Make Kids Smarter?” CNET News, June 3, 2010.
225. “Study: Too Few Schools Are Teaching Cyber Safety,” eSchool News, February 26, 2010.
226. Randolph E. Schmid, “Study: Multitaskers Do It Badly,” USNews.com, August 24,
2009.
227. Teddy Wayne, “Teenagers Text More Than They Call,” New York Times, May 23,
2010.
228. Bell, “Can Apps Make Kids Smarter?”
229. Matt Richtel, “Hooked on Gadgets, and Paying a Mental Price,” New York Times,
June 6, 2010.
230. “Researchers: Even Violent Video Games Can Be Learning Tools,” eSchool News,
May 28, 2010.
231. Pierce, “Survey Reveals Gaps.”
232. Laura Devaney, “Online Safety Report Discourages Scare Tactics,” eSchool News,
June 7, 2010.
233. EDUCAUSE Current Issues Survey, 2009.
234. Dennis Carter, “Survey: ‘Digital Natives’ Need More IT Support,” eSchool News, April
22, 2010.
235. “State of the CIO Survey,” CIO magazine, 2009-2010.

308 | references
the shift

236. Bob Evans, “ConocoPhillips And Harrah’s Put CIO Positions on Ice,”
Information Week, April 1, 2009.
237. “State of the CIO Survey.”
238. PricewaterhouseCoopers, “Trial by Fire,” 2009.
239. Bob Evans, “Global CIO: IBM’s New CIO Sheds Light on Priorities and Plans,”
Information Week, November 4, 2009.
240. Stoyan Bojinov, “ETFs for the ‘Next 11’ Economies”, ETFdb, November 23, 2010.
241. “Mexico Marks Revolution Centennial Amid New Struggles,” The Age, November
21, 2010, http://news.theage.com.au/breaking-news-world/mexico-marks-
revolution-centennial-amid-new-struggles-20101121-182at.html .
242. David Agren, “Mexico’s $80M Boom Industry: Bulletproof Cars,” USA Today,
November 16, 2010.
243. J. Cox, “Mexican Gangs Reportedly Use YouTube,” November 6, 2010.
244. Mark Stevenson, “Mexico Violence Costs $350K Daily in Natgas Losses,”
Associate Press. November 11, 2010.
245. “Mexico Marks Revolution Centennial Amid New Struggles.”
246. “Ten High Tech Hot Spots,” The Next Silicon Valley, August 11, 2010.
247. Research and Markets: Mexico Telecommunications Report Q4 2010,
Business Wire, November 23, 2010, http://www.businesswire.com/news/
home/20101123006653/en/Research-Markets-Mexico-Telecommunications-
Report-Q4-2010 .
248. Crayton Harrison, “America Movil CFO Sees 50 Million Potential Mexico Mobile
Banking Users,” Bloomberg, November 23, 2010, http://www.bloomberg.com/
news/2010-11-23/america-movil-cfo-sees-50-million-potential-mexico-bank-
users.html .
249. Bill Wilson, “Running the 2016 Rio Olympics”, BBC News, November 23, 2010.
250. Ibid.
251. Juan Forero. “Brazil’s Middle Class Takes Flight,” The Washington Post,
November 4, 2010.
252. Jeff Swicord. “In Brazil, Economic Reforms, Social Programs Expand Middle
Class,” VOANews.com, November 1, 2010.
253. Forero, “Brazil’s Middle Class Takes Flight.”
254. “ATG Powers Successful Web Re-Launch for Netshoes,” Business Wire,
November 23, 2010.

references | 309
the shift

255. Molly McHugh, “LinkedIn Growing at a Member per Second,” Digital Trends,
November 18, 2010.
256. Erik German, “The Internet’s New Billion,” GlobalPost, November 15, 2010.
257. Gabriel Elizondo, “Media in Relation to Brazil’s Election,” November 16, 2010.
258. Frederic Lardinois, “Facebook Growing Fast in Brazil, but Orkut Still Far Ahead,”
ReadWriteWeb, October 7, 2010.
259. Ronny Kerr, “Facebook Links Accounts with Mixi in Japan,” Vator News,
October 29, 2010.
260. “Mobile Penetration Rate Topped 100% in October,” TeleGeography’s CommsUpdate,
November 22, 2010, http://www.telegeography.com/cu/article.php?article_
id=35284 .
261. “Mobile work: A way to earn money by texting,” The Economist, October 28, 2010.
262. “Mobile Web Set to Make Global Impact,” warc, November 18, 2010,
http://www.warc.com/News/TopNews.asp?ID=27517 .
263. Patrick Nixon, “Brazil Could See First Sub-US$100 Smartphone in 2011,”
Business News Americas, November 18, 2010.
264. “Mexico’s Type 2 Diabetes Market will Exceed $1.2 Billion in 2014,”
Decision Resources, November 15, 2010.
265. Jack Boulware, “The Orkut Effect,” American Way, November 1, 2010.
266. “Mobile Penetration Rate Topped 100% in October.”
267. “Research: eMarketer predicts ad spending growth in LatAm of 6-9% annually
through 2014,” Portada, November 18, 2010.
268. Gordon Hanson, “Why Isn’t Mexico Rich?” UC San Diego and NBER,
September 2010.
269. Ibid.
270. “Doing Business 2011,” The International Bank for Reconstruction and
Development/The World Bank, 2010.
271. Mike Dorning, “US Loses No.1 to Brazil-China-India Market in Investor Poll,”
Bloomberg, September 20, 2010.

310 | references
the shift

272. “Brazil the Next Emerging Technology Market – Has a $1.6 Trillion Economy,”
The Next Silicon Valley, May 12, 2010, http://thenextsiliconvalley.com/articles-
reports/technology-development/brazil-next-emerging-technology-market-has-
16-trillion-econo .
273. “Ten High Tech Hot Spots,” The Next Silicon Valley, August 11, 2010.
274. Alexandre Marinas. “Apple’s iPhone Void Leaves Brazil Begging,” Bloomberg
Opinion, November 29, 2010.
275. Ibid.
276. Matt Rhodes, “Brazil Tops League of Social Media Users,” June 17, 2010.
277. Marinas, “Apple’s iPhone Void.”
278. Beecher Tuttle, “$1,500 iPads Flying Off Shelves in Brazil,” TMCnet,
December 3, 2010.
279. Marinas, “Apple’s iPhone Void.”
280. ,“IT Spending in Brazil to Reach $134.2bn in 2014,” The Next Silicon Valley,
September 16, 2010.
281. “Global Developer Population and Demographics Report,” Evans, 2010.
282. Verne G. Kopytoff, “For PayPal, the Future is Mobile,” The New York Times,
November 28, 2010.
283. Ibid.
284. Clint Boulton, “Google, Apple Joust for Mobile Payments via Android, iPhone,”
eWeek.com, August 21, 2010.

references | 311
the shift

312 | references
Allison Cerra is
Vice President of Marketing,
Communications and Public
Affairs for Alcatel-Lucent in the
Americas Region. In this capacity,
Allison oversees marketing
strategy and communications
and engages with North and
South American service providers
on go-to-market approaches
to drive revenue and/or reduce
churn. Allison has more than
15 years of telecommunications
experience in marketing, sales
and product management
functions across service provider
and equipment vendor industries.
She holds two Bachelors
degrees from the University of
South Florida and Masters of
Business Administration and
Telecommunications degrees
from Southern Methodist
University.

Christina James is a
Director of Solutions Marketing
at Alcatel-Lucent with 15 years
experience in marketing
and communications in the
technology sector. She has
helped define, launch and
support strategic solutions for
carriers and for enterprises,
particularly in the education and
healthcare markets. She has also
worked as a marketing consultant
and freelance writer. Christina
has Bachelor of Arts degrees
in journalism and English from
Southern Methodist University
and a Master of Arts degree in
American literature from the
University of Texas at Austin.
www.theshiftonline.com

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