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fT Shi
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 oneway, 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

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fT Shi
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

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> 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.
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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
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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
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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.
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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

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TheWorld end of The

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> 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
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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
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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, usergenerated 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
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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
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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.

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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
one-way communication Text-laden web environment Broadband for fixed networks Flat-rate broadband pricing Providers aspire to develop the next “killer app”

2 .0
Two-way experiences Video-rich web environment Broadband across any network Metered broadband pricing ecosystem of developers leveraged 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.
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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
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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 permissionbased 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
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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
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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.
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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.

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baby boomerS The eTernally
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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.

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> 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 postWWII, running from 1946 to 1964. Current estimates of their numbers vary from 76 million to nearly 80 million.

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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
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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
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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 inhome 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.

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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 selfindulgence, 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
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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 inhome 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

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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
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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.
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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

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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 timestarved 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.

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generaTion america’S
middle children

X
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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.”

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> 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.

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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.”
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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 dotcom 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 worklife 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
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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
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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.

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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,
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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.

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> 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.

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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 twoway 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, broadcaststyle communications and technologies.

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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

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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
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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:
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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 worklife 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.
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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

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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
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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.

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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).

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> 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.

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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.

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> 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.
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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
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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 onetime 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
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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 2 3 4 5 6 7 8 9 develop the idea. decide upon the target market or typical user profile. Make a hardware choice for output and identify associated requirements. Pick one or more programming languages. design a prototype of the program or service. write the program. Test the program (also known as alpha testing). debug any problems identified through alpha testing. 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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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-tomarket 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.

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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 webbased architectures to appeal to larger numbers

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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.

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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
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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
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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 webbased 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,
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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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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
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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 revenuesharing 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:
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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,
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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 networkbased 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 revenuesharing 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.

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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-ofservice 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
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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.)
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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 highmaintenance 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 thirdparty 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
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> 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.
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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.

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adverTiSing
The eyeS have iT

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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
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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
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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.

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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 2 3 4 5 6 7 Mobile is personal. Mobile is permanently carried. Mobile is always on. Mobile has a built-in payment method. only mobile is always present at the creative impulse. Mobile has the best audience measurement. 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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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.

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.

Google/AdMob

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 thirdparty 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 AlcatelLucent 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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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 Solitary Fixed location 3+ hours Sift through results Frequently click around often research-oriented mobile Social on the go 3 minutes Top 3 results or less Almost never click through 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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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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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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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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The conSumer 2.0 influence

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The neXT unSTable buSineSS model

video

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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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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 in the home watching timeshifted TV using the Internet watching video on Internet using a mobile phone Mobile subscribers watching video on a mobile phone

284,396

284,574

281,746

0.9%

82.297

79,533

62,240

32.2%

191,035

163,110

159,986

19.4%

133,962

131,102

119,164

12.4%

233,722

230,436

221,651

5.4%

15,267

13,419

9,004

70.0%

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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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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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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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.

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 settop 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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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 highfrequency 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 subscriptionbased 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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moneTizing billionS of converSaTionS

Social neTWorKing
SoCIAl NeTworKINg: MoNeTIzINg BIllIoNS oF CoNVerSATIoNS |

chaPTer 9

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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 applicationenabled 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 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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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 recommendation PercenT 29% eXamPle Building a new playlist – any ideas for good running songs? I am wondering if I should buy the Kitchen-Aid ice cream maker? Anyone know a way to put excel charts into laTeX? Is there anything in life you’re afraid you won’t achieve? who wants to go to Navya lounge this evening? Needing a baby sitter in a big way tonight... anyone?? I am hiring in my team. do you know anyone who would be interested? Could any of my friends use boys size 4 jeans?

opinion

22%

Factual knowledge

17%

rhetorical

14%

Invitation

9%

Favor

4%

Social connection

3%

offer

2%

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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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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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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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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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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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:
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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 12–17 18–24 25–34 35–44 45–54 55–65

% of gamers 7% 18% 24% 22% 13% 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 Androidbased 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
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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 Average Age % under 17 App downloads/month Paid app downloads/ month Min/day using apps 37 25 8.8 1.8 79 iPod Touch 23 65 12.1 1.6 100 android 35 24 8.7 1.1 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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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 PacMan 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 selfidentified 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 peruse 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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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 networkbased 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
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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 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 overengineering 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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healThcare
high STaKeS higher reWardS
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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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> 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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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 realtime 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 boundaryless collaboration, consultation, and communication between physicians, patients,
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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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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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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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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 techsavvy, 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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> 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)
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> 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 contextualbased 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
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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 textbased 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.

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educaTion
The global achievemenT race
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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.

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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,
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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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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), distancelearning enrollment continues to grow faster than overall college enrollment numbers, jumping by 22% in American community colleges during the 2008229

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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-yearolds, 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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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
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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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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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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.

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iT in The large
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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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> 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
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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-andtackling 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

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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
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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
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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 overengineered—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.

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> 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.

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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 networkenabled 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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> 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 singlehandedly 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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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
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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
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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
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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
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> 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 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 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 highfrequency 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 thirtytwo 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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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.
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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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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.

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> 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
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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 onesize-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
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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
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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
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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
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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
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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 safetyconscious 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.

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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.
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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.

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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.

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> 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
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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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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.
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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 goto-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
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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 lowercost 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
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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 revenuesharing 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
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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.
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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.

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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
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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
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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.

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> 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.

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Ibid. “Hulu’s Business Model,” http://www.hulu.com/about/media_faq . Janko Roettgers, “Hulu Brings in the Dough: $240M in Revenue in 2010,” GigaOM, http://www.gigaom.com/video/hulu-brings-in-the-dough-240m-ofrevenue-in-2010 . Ibid. IAB, “Platform Status Report.” “ABC iPad app syncs with ‘My Generation’ Using Audio Watermarks,” MacNews, September 19, 2010, http://macnews.desinformado.com/2010/09/abc-ipad-appsyncs-with-my-generation-using-audio-watermarks/ . Cynthia Littleton, “Biz sees decade of tumult,” Variety, December 18, 2009, http://www.variety.com/index.asp?layout=print_story&articleid=VR111801298 4&categoryid=-1 . Paul Farhi, “Click, Change,” The Washington Post, May 17, 2009, http://www.washingtonpost.com/wp-dyn/content/article/2009/05/14/ AR2009051404522_pf.html . 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 “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 . James McQuivey, “Google TV Is A Bigger Deal Than You Think,” Forrester Research Blog, June 10, 2010, http://blogs.forrester.com/james_mcquivey/10-0610-google_tv_bigger_deal_you_think . The Battle for the North American Couch Potato, The Convergence Consulting Group. 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 . Farhi, ”Click, Change.” Ibid. Ronald Gover, Tom Lowry, and Cliff Edwards, “Revenge of the Cable Guys,” Business Week, March 22–29, 2010.

81. 82. 83.

84.

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89. 90.

91. 92. 93.

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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/inthe-mother-1/ . Clay Shirky, “The Collapse of Complex Business Models,” April 2010, http://www.shirky.com/weblog/2010/04/the-collapse-of-complex-businessmodels/ . Michael Greeson, “Profiling Online Video Viewers,” GigaOM Pro, April 5, 2010, http://pro.gigaom.com/2010/04/survey-who-are-those-masked-online-videoviewers/ . Littleton, “Biz Sees Decade of Tumult.” Nellie Andreeva, “Development Wheels Coming Off,” Hollywood Reporter, December 17, 2007. Andreeva, 2007.

95.

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97. 98. 99.

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-financesdoes-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-tomainstream/ . 110. Tom Simonite, “Yahoo Brings Apps to TVs,” Technology Review, September 15, 2010, http://www.technologyreview.com/communications/26295/?a=f .

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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/sonycuts-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-fanboyssay-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.”

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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-googleyahoo-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 .

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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/appleportable-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-ontap/ . 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-arecompeting-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 .
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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-a43-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-socialgaming-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-nabsinaugural-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.

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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.
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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.
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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.
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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-marksrevolution-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-TelecommunicationsReport-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-bankusers.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.
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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.

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272. “Brazil the Next Emerging Technology Market – Has a $1.6 Trillion Economy,” The Next Silicon Valley, May 12, 2010, http://thenextsiliconvalley.com/articlesreports/technology-development/brazil-next-emerging-technology-market-has16-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.

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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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