AT&T introduces sponsored data

AT&T announced today that it will start offering a “Sponsored Data” model for mobile data, allowing third parties to pay for mobile data used by consumers on smartphones, tablets and mobile hotspots. The following comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

AT&T’s announcement has been rumored for some time, and has generated mixed feelings in the past, raising concerns about net neutrality, consumer transparency and other issues. The announcement itself has positive and negative implications, as outlined below.

Positives:

AT&T’s announcement is a rare sign of real innovation from a carrier in charging for services – the first time a carrier has charged anyone but the end user for mobile data – and that makes this an important milestone. This gives developers a great additional option for engaging users, and especially for lowering the barrier to entry from engaging with their apps. It will have the biggest impact for applications involving video, since that’s the biggest driver of bandwidth consumption, but it will be useful for other services too. It might also help solve the issue of who pays for the data when employees bring their own devices to work – today employees often bear all the costs of using their own devices, even when they’re working, and the solutions on offer have been pretty terrible. This offers a more granular, sophisticated approach to the problem.

Negatives:

Despite all this, concerns will remain. Some have expressed concern that only major content providers will be in a position to afford to sponsor users’ data, creating a two-tier system where smaller content providers can’t compete effectively. There is also potential for fraud, with bandwidth-intensive applications claiming to be providing sponsored data, much as premium rate phone lines once scammed users. The 1-800 number analogy therefore has a 1-900 number counterpart. AT&T will have to work to provide better verification for consumers to avoid this problem in the medium to long term. Educating consumers on this model will be challenging, too, as it’s very different from what’s been done before. The biggest challenge from a developer perspective will be implementing the technology in a way that takes advantage of AT&Ts network without confusing or frustrating users on other networks.

Overall, this is a good bit of innovation from AT&T, but a lot will depend on the early applications that make use of the model. If some applications get out of the gate quickly which show real consumer benefit from using sponsored data, that could help turn this into a real success for AT&T. But if there aren’t good, pro-consumer applications pretty quickly after launch, there’s a real risk that the negative publicity will overwhelm sponsored data before it has a chance to take hold.

BlackBerry takes baby steps towards a new strategy

BlackBerry announced its earnings for the quarter ended November 30, 2013 today. Among other things, the company announced a move to a new operating structure and a device manufacturing agreement with Foxconn. The following comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

BlackBerry has struggled greatly over the last couple of years, and the latest results show a worsening in essentially every number the company reports. BlackBerry hasn’t shipped this few devices in a quarter since 2006, and revenues haven’t been this low since the iPhone launched. Importantly, BlackBerry actually sold 4.3 million devices to end users, of which 1.1 million were BlackBerry 10 devices. BlackBerry 10 continues to be a flop, while customers in emerging markets continue to buy older BlackBerry 7 devices.

John Chen announced a new internal operating structure around four major segments: devices, enterprise software and services, BBM and QNX embedded systems. This is an excellent step as it recognizes the three growth areas that are critical to the company’s turnaround and offsetting the declines in the core devices business. However, the company stopped short of reporting revenues in any of these new segments, which is a sign of just how small the revenues there are today. BlackBerry needs to grow these three revenue streams enormously in the near future to make up for the loss in revenues in the handset business (see this post for more details). The company’s BES10 enterprise management system hasn’t generated any revenue yet, BBM won’t generate meaningful revenue until late 2015 at the earliest, and QNX revenue also remains tiny. As such, the company will see continued struggles in core devices and services revenue for some time to come, and won’t become profitable for two years, and will burn cash for much of the interim.

The Foxconn arrangement is an enormous step forward in devices. The company would have found it impossible to turn around its device business if it had kept it in-house, so this is about the only way BlackBerry could have saved it. Foxconn clearly has huge experience in manufacturing devices, and massive scale thanks to partnerships with Apple and others. But this is the first time Foxconn will be taking the lead in designing hardware for a major manufacturer, and that creates uncertainty about the quality of the devices. BlackBerry’s own hardware has not been stellar, so there may be upside here as well as risk, but neglecting the hardware as a core capability suggests BlackBerry may be underestimating its importance. However, it will stop the sort of inventory write-downs we’ve seen the last two quarters, which make the headline profitability numbers look so awful. But it won’t turn around devices revenue (or the service revenue which follows it) for some time to come.

Jan Dawson is available for comment at jan@jackdawresearch.com and (408) 744-6244.

Carriers’ unlocking proposal de-fangs new FCC chairman

News: The five major US mobile carriers have today announced a voluntary code of practice regarding cellphone unlocking.

Comment, attributable to Jan Dawson, Chief Analyst, Jackdaw Research: The carriers are clearly responding to remarks by Tom Wheeler, the new FCC chairman, on the topic of unlocking. The threat of regulation is always a great way to motivate players to self-regulate, and this is in many ways a better outcome, because it will happen more quickly and more easily than through a protracted regulatory process.

The carriers clearly felt that if they were to change their unlocking policies, they’d rather do it on their terms than someone else’s, and as such they’ve taken important but not world-changing steps here. The biggest change is transparency and clarity about policies, which have been utterly opaque to consumers in the past. Consumers can now know exactly what their carrier’s policy is, and will even be proactively notified when they’re eligible for unlocking.

This move will likely benefit T-Mobile most significantly, as it continues to aggressively target AT&T’s customers, which are the best fit for switching networks. But as more carriers offer preferential rates for customers bringing their own devices, unlocking will become a more significant issue. This may lead to a rise in churn rates, which in turn will force carriers to respond more aggressively to competitive threats.

It’s clearly good news for consumers. They were never going to see carriers unlocking phones still on a two-year contract without early termination fees, but this was about the best they could have hoped for.

Comment on failure of BlackBerry buyout

BlackBerry has announced that it would receive a $1 billion investment from Fairfax Financial and other investors, representing the conclusion of its process of seeking strategic alternatives for taking the company forward. Fairfax had wanted to acquire BlackBerry outright, but with the deadline looming today it looks like it fell short of raising the necessary funds, so this represents plan B. Jackdaw Chief Analyst, Jan Dawson, has the following comments:

“The appointment of enterprise software veteran John Chen, former CEO of Sybase, as chairman and interim CEO of BlackBerry suggests that Fairfax and others see the company’s future in software rather than devices. This makes sense in light of BlackBerry’s sputtering device shipments over the past few months, but it’s still not clear where that growth will come from.

“BlackBerry’s new investors seem to see its future in software, which means using BlackBerry servers as the core of a broader enterprise device management platform, but this generates very little revenue for the company today. Though it’s achieved some traction with enterprises upgrading their BlackBerry servers, it has failed to sell many BlackBerry 10 devices, and this looks unlikely to change. This ultimately harms the unique selling point of BlackBerry server products leaving the door open to replacement by rivals that are better able to support the more popular Apple and Android devices.

“At the same time, it’s also too much to expect BlackBerry’s other software investments to ramp up fast enough to secure its long-term survival and return to growth. QNX, whose main value was providing an OS for its devices, currently generates less than $100 million a year. Equally, BlackBerry Messenger has had a good couple of weeks of downloads as a cross-platform messaging option, but continues to trail other similar messaging apps significantly.

“Fairfax’s investment will buy the company some time, which it badly needs, but the company needs a new strategy more than ever. If Fairfax had taken the company private, it could have kept that strategy to itself. But with BlackBerry remaining a public company, Chen and Fairfax Chairman and CEO Prem Watsa need to start communicating that new strategy very soon to inspire confidence in a turnaround.”

Comment on iPad Air and Retina iPad Mini launch

Following the raft of new products and price changes announced by Apple this evening, Jan Dawson, Chief Analyst at Jackdaw, has the following initial comments:

“As expected, Apple took some cues from the iPad Mini in launching the new iPad Air, which is thinner and lighter, while adopting many of the internal improvements first seen in the iPhone 5S. This represents a good enough boost to the previous version to trigger good upgrade sales and get iPad shipments growing again, which was a key objective for this launch. However, the company also took a step back from the strategy it adopted when it launched the first iPad Mini. When that device launched, it was with a sub-par display and specs that matched the older iPad 2. The new iPad Mini and iPad Air both have top-of-the-line specs, and start at $399, meaning that the minimum price for a high-performance iPad has actually gone up. Meanwhile, the iPad 2 and iPad Mini will remain on sale at lower prices, but with significantly less appeal given the gap in specs between them and the new iPads. It seems as though Apple is trying to push average selling prices for iPads back up again after they’ve dropped steadily over the past year. Both devices should sell very well, especially over the holiday period, but Apple held off being as disruptive as they might have been by pricing them relatively high.

“This is the clearest statement Apple could have made that it is only interested in competing in the premium tablet space. The yawning gap between the specs of the cheaper iPad Mini and iPad 2 and the new iPads signifies that it is only willing to compete at the lower price points with older models. This leaves a huge chunk of the tablet market unserved by Apple while others such as Google, Amazon and a raft of others aggressively target the sub-$400 market. This reinforces our view that Apple’s share in tablets will continue to fall as Android’s share rises over the coming years.

“Though the iPad news will generate the headlines, the changes to Apple’s software licensing for Mac OS X, iLife and iWork is also important, not least for Microsoft. Microsoft generates 96% of its operating margins from operating system and productivity software licensing, and Apple is now teaching people to expect both of those things to be free. While this won’t disrupt Microsoft’s business overnight, it will create further pressure on Microsoft to bring down prices for its productivity software and especially for Windows.”