The Marginal Utility of Smart Phones, Cable TV...and Healthcare

I purchased a new smart phone yesterday.  While I was waiting for the transaction to be completed which, as you are quite aware, is not like buying ice cream at the local Baskin Robbins, I couldn't help but notice the number of people who came up to the counter to pay their mobile phone bills.  First, I didn't know one could pay their mobile phone bill at their local Verizon Wireless store, but what struck me more was the amount these people were paying given each person's age and/or physical condition.  One elderly woman approached the counter with what looked to be her grandchildren.  She hobbled to the associate and wanted to pay her mobile phone bill, which was somewhere in the neighborhood of $140.  Hearing this made me think about how much we pay for things like mobile phones and cable TV service, and wondering, do we really need the plans for which we pay?  The basic plan for my wife and I, this is the BASIC plan for a family of two with two smart phones, costs $130 per month and does not include unlimited text messaging, VCAST services, the Rhapsody music service and a host of other ad hoc services the Verizon associate rattled off.  $130 per month for the privilege of sending and receiving megabits of information over the wireless spectrum all in an attempt to stay connected to friends, family and business contacts, read email and surf the web.  Cable TV package prices begin anywhere from $50 - $75 per month for basic cable.  Add a digital cable box for each TV set (average of 2.3 per home), subscription fees to premium channels and services (e.g. HBO) and the bill easily tops $100 per month.  Add to that Cable Modem service (usually $45 - $55 per month) and one's Cable TV bill crosses the $150 per month plateau.  Suffice it to say, the average household is probably paying between $250 and $350 per month for mobile phone and cable TV services.  That leads me to to healthcare.

The cost of health insurance varies depending on family size, location, pre-existing medical conditions, lifestyle (i.e. smoking, excessive drinking, addictions, etc.), but how many of the 47 million people who do not have health insurance (as we are being told by government sources) pay between $250 and $350 per month for their mobile phone and Cable TV services?  It would be interesting to see the results of a survey of this topic.  Yet these people claim they can not find affordable health insurance?  In this sense, affordable becomes a function of what disposable income is left after considering other household expenses and service decisions, or, in economic parlance, one's marginal utility for alternative spending choices.  Household consumption behavior (Dr. Law would be so proud!) is predicated on the assumption that members of a household wish to maximize their total utility given their economic circumstances, but to do this must make choices between alternative spending options given finite resources.  Consumers will continue to switch expenditures between alternatives based on which provides more utility, or satisfaction, at a given time.  I couldn't help but think about this as the little elderly lady hobbled up to pay her $140 mobile phone bill.  Statistics are available that show consumers will pay their Cable TV and mobile phone bills before they will pay their rent or mortgage - higher marginal utility for mobile phones versus the roof over their heads!  My guess is the same is true of health insurance.  Sure, there are many who simply can not afford health insurance and who also don't have the luxury of a mobile phone or Cable TV.  But for those who do have the choice, are they making a wise one?  If someone chooses "nice to have" services, like mobile phones or Cable TV, over healthcare services or health insurance, the debate for this segment of the population becomes one of personal choices, priorities and the value placed on the last dollar spent on each alternative - marginal utilities. 

Affordable versions of mobile phones and Cable TV services exist, with the savings from selecting lower service options available for use by individuals to purchase affordable options for health insurance.  For example, Verizon Wireless offers a plan for users over 65 years of age that costs only $29 per month.  The PEG (Public, Education & Government) channels on a cable system, which includes the local broadcast stations, can be had for about $20 per month.  No ESPN.  No MTV.  No CNN.  But the local football and baseball games!  Over the air digital channels are free now with the Government subsidized converter box.  Affordable, albeit basic, service options exist.

Most people only think about healthcare and the cost of health insurance when they are sick or when they are doing the annual selection dance for their employer.  We think about staying connected and entertained daily, if not hourly, or every minute.  If healthcare and health insurance were viewed with the same or higher perceived value by individuals given the cost of each alternative, that is, with a higher marginal utility, as our need to stay connected via mobile phones or the need for Cable TV, would there be an effort in this country to find a solution for "affordable" personal connectivity and entertainment services using the limited disposable income available to consumers after paying for their health insurance and healthcare services?  Would there be cries for "Government Options" for "affordable" mobile phone and Cable TV services?  You can imagine who would be up in arms about this, and mobilizing lobbyists, to prevent Government run mobile phone and Cable TV services that currently exist in many other countries. 

Early economists struggled with a concept called the Paradox of Value, including good old Adam Smith.  This paradox posited that necessary commodities were observed to have prices that were lower compared to the prices of luxury commodities.  Have we reached the point in society where mobile phones and Cable TV are viewed as necessities (although not cheap ones), and healthcare a luxury good, that one's marginal utility for staying connected has more value, or personal satisfaction, than staying healthy?

Twitter + Investors = $255M Valuation. Huh??

Twitter is all the rage, but I am confused. Not by how to use Twitter, but how theoretically intelligent people can invest a total of $55M, at a perceived valuation of $255M, in a company that has no business model, no revenue streams and that has a retention rate of close to 60% after 60 days, meaning 40% of the users do not come back. Huh? Is there fear of missing a 10X ROI or the next Google? That wouldn’t be true as Google came out of the box with a business model. I’ve read and reread recent articles in the WSJ and the NY Times. I watched an interview with Evan Williams on CNBC from the All Things Digital conference. The founders openly admit they have no business model, although they have a couple of ideas. They admit they have interviewed business oriented types but have “turned most of them down”. They offer that their plans for the future include managing growth and focusing on a new homepage. Huh? My work with Venture Capitalists, Private Investors, new ventures and corporations relied on several items to start an investment conversation. Top priorities have always been a sound business model, a proven management team and exit strategy that returned value to the investors. Most investors also look for the product or service to provide unique value to the target market, whether the service solves a problem, creates an efficiency, reduces costs of an existing operation - there has to be something truly unique that offers differentiation from an existing practice, or a disruption in an existing paradigm. Does Twitter do any of this? Can’t I broadcast via text message, email or even on Facebook what I am doing, where I am located, or what I am seeing? Where is the differentiation? Many mobile apps are available that let me do these things. The one apparent difference is that I have to sign up to follow someone on Twitter - a person, group, product, event, company - who might otherwise not know that I am interested. I could poll people and receive instant replies from my “followers”, as David Pogue has done during speaking engagements. I’m sure there are other uses, but are they clear differentiators that could drive a viable business model, the current valuation and a perception of a sale of close to $1.0B? Does anyone remember Broadcast.com? Sold for $4.0B to Yahoo! and made Mark Cuban rich. How’d that work out for Yahoo!?

My other concern is that smart people in large corporations are already figuring out ways to use this FREE tool in their marketing campaigns to drive incremental revenue, market share and to develop loyalty programs for their products and services. Is the cart before the horse? If these folks figure out how to make money off of Twitter before Twitter figures out how to charge them for use of the service, can Twitter shut off the spigot and then ask to be paid for business models created by others?

Look, I’m sure the smart folks who have invested in Twitter have more information about the company and potential business models than the general public, but it sure doesn’t appear that way from interviews. They obviously have done their due diligence and vetting before making an investment, and had their number crunchers pick apart whatever financial models they were provided by Twitter. I also suppose they are sitting in Board meetings offering guidance to the founders and direction on building the company.

Perhaps the most valuable information is what Twitter stores on its servers from the Tweets of its users that can be parsed in ways akin to what Google does to generate very targeted advertising campaigns. And therein may lie the answer to the business model conundrum. Hmmmmm.

All Skyped Up!

I don't know about you, but I'm very intrigued by Skype's recent announcements.  Its clear their strategy is to move away from voice communication via computer and onto mobile devices.  Besides the app for the iPhone they already offer software for smart phones running Windows Mobile OS and for the Android G1 phone.  The software is also able to make calls over 3G networks of T-Mobile using the G1 platform and using the HTC's Touch Pro on VZW.  AT&T terms of service block use of its 3G network using the iPhone. But isn't it just a matter of time before all mobile communication goes VoIP?  The current carriers will slow roll this to protect their investment in infrastructure AND to achieve some sort of payback on their investments in wireless licenses.  At some point in time the volume of wireless mobile activity using the cheaper VoIP services, like Skype, will just eat away the margins of the existing mobile providers and bring about a dramatic change in how consumers communicate wirelessly.  Its similar to how the existing land lines are disappearing in favor of mobile.  The carriers are still "milking the cow" and offering pricing plans to entice consumers to hang onto their land lines, but for how long?  I'm not suggesting this will happen overnight, but it will happen.  Which begs the question, why would Cox Communications make the investment to launch their own wireless network in their service areas (just announced this week)?  I'm not sure this is the best use of corporate funds, or that it will provide the best return for investors over the long term, given the move to VoIP on mobile phones.  Using a VoIP based mobile untangles the phone from the network and gives the consumer freedom to choose additional apps, music, video or other, from their vendor of choice.  Is there a play for a Qualcomm branded VoIP phone that includes its MediaFLO service?  Why not?  Again, not tomorrow, but the evolution to this model is slowly taking shape.  And how would a nationwide WiMAX service fit into the equation (Clearwire)?  I guess we'll all just have to stay tuned, or connected.

MSFT @ the Mall?

Was anyone else as shocked as I to open their newspaper on Friday to read of Microsoft's intention to open retail stores to promote their products?  I glanced at the date and read "Friday, February 13, 2009" and thought surely this must be incorrect, or a bad joke.  Perhaps there is logic in this strategy somewhere, but to most pundits it appears to be nothing less than yet another MSFT "Me Too" strategy, copying one that was implemented by Apple 1-2 years earlier.  I just don't see the comparison.  Sure, MSFT can show their latest Zune products, demonstrate the latest release of Windows for the PC or mobile devices, or the latest updates for the Xbox platform, but do you see anyone lining up outside of the MSFT store waiting for the next Zune to drop, as they do the iPod and iPhone?  Really?  I was taken by the fact that MSFT tested this concept in a 20,000 square foot warehouse near its Seattle campus.  Really, again?  And what did you think the answer to this market research would tell you?  Not to go forward?  Perhaps this is just a way shift marketing dollars to a platform with a measureable ROI (who LOVED the Seinfeld commercials?  Hands up!) instead of fighting those Mac Vs PC commercials.

It also begs the question of why when you consider the dominant market share MSFT has in Windows for the PC and corporate markets.  This is where their bread is buttered, yet MSFT has this incessant need to prove its as hip and cool as Apple.  Tough love MSFT - you're not, and never will be.  You haven't caught up to Apple in the digital device space.  You haven't caught up to Google in the search space.  And you are losing share to Firefox and Safari in the web Browser space.  This need to try to prove you are a company that develops must have products with cache is getting old.  Stick to your knitting before "cloud" and SaaS applications blindside you and erode your core business while you are focused on being sexy.

One of the big political tricks used by many a pol is to label an opponent in a fashion that defines them before they can define themselves.  This puts one in the position of always having to answer questions raised by the opponent's definition of them and removes focus from the candidates true skills and values.  Unfortunately for MSFT, Apple has done an amazing job of defining MSFT as an old, stodgy, not hip company to which MSFT spends an inordinate amount of time and money screaming, "no, that's not who we are. We can be cool too".  Rather than continuing to fight the label Apple has placed upon them with dollars and "me too" campaigns MSFT would be better off ignoring the spin and focusing on the values that made them the dominant company in the markets where they are leaders.  MSFT can still launch new devices and services for the digital media marketplace, but do it on terms that don't appear like you are simply denouncing how Apple has postioned you and your technology.  And following their strategies is not the answer.

Clearwire - is it really that Clear?

I have enjoyed reading the articles and comments by pundits about the recent Clearwire:Sprint, et.al. hook-up to create a national WiMax network.  Other participants in this love fest include Google, Comcast, Time Warner and Intel.  Hope I haven't forgotten anyone.  The pundits, news media and bloggers talk about data speeds, 3G Vs 4G, LTE Vs WiMax and a variety of other factors one can analyze.  While this is all well and good let's put out there the obvious - how will these prima donna's of their respective industries ever agree on a strategy and business plan that meets everyone's objectives?  The cable companies are investing $1.0B each, Google about a half billion and Intel somewhere in the same range.  On paper the combination makes sense.  In reality the self-interests of the participants will overshadow the execution of the business strategy.  I harken back to my days working for the Tele-TV JV between 3 RBOCS and Creative Artisits Agency.  The JV was formed to develop a service for one platform and to take advantage of economies of scale in developing and rolling out the service.  Almost immediately issues arose with the ability to execute the business plan on that platform.  Within one year tests were being performed to evaluate wireless MMDS and advanced fiber technologies while the partners battled other issues in the respective markets and with each other, creating diverging objectives and eliminating the economies of scale the venture was formed to achieve.

As in the TTV JV, this WiMax venture includes participants who are monopolists in their markets, and market leaders in other industries, who are used to getting their way.  Stories about the venture never getting off the ground because competing interests could not be resolved have appeared in several industry blogs.  Not to mention that by the time this JV rolls out its service (2010 nationwide?) technology will have advanced, that Moore's Law thing, that will undoubtedly force the partners to revisit the business model and their positions/objectives in the JV.  Case in point, ask Earthlink about the muni-wifi services they rolled out in several cities, like Philadelphia (look out Anaheim!), that they are now exiting.  Maybe it was foolish to think an advertising based model would fund the capital requirements and operating costs of the muni-wifi network.  As I always say, financial modeling is an art, not a science.  Tell me what picture you want to paint and I can create a model to support it!

I don't mean to be douse the fire with water.  I wish the partners the best of luck, especially if they create a viable service that creates competition in the marketplace.  I'd just love to be a fly on the wall at the Board meetings of the venture as the partners work to protect their interest and insure they maximize their ROI in this JV.