Tioga Venture Blog

Gemalto acquisition of Netsize: looking at the numbers

In January last year, Gemalto acquired Netsize. Back then, we shared our thoughts on the impact of this deal on the mobile payment industry (read details here). A few months afterward, we looked for some detail numbers in the H1 results of Gemalto… and could not find much (analysis of Gemalto H1 result here). Gemalto published last week its results and detailed annual report for 2010. Hopefully, this will give us a little more insight into this landmark transaction.

For the first time in its official document, Gemalto shares with is shareholders some details on the Netsize acquisition: "At the start of the year we took a controlling stake in Netsize, with its under-utilized mobile commerce and mobile marketing platform. This makes Gemalto a key player in mobile application sales, and rounds out the services we provide to operators to bolster their subscriber revenues."

The annual report is actually quite rich in numbers about Netsize:

• In 2010, Netsize's revenue were 61M€ and net profit was -4M€
• Gemalto paid 9M€ in cash for an extra 61,53% of Netsize to increase its stake to 85,65%
• At the time of acquisition, Netsize fair value of net assets was a significant -10,6M€. This situation probably explains the somewhat low valuation reached by the company.
• The net result is a goodwill of 18M€, net of minority shareholders' interest

Since the acquisition, things have also change at the management level. According to Netsize website management page, Stanislas Chesnais the founder and CEO has now left the company. Michel Leger, the first COO under Gemalto's watch has now joined Ingenico.

Windows Phone 7: the targeting issue

Windows Phone 7 has now been on the market for several months and we thought it was time for us to share some thoughts on the product. We will not do a detailed review of all functionalities, as this has been covered in great many details by many blogs.

Key question: "Is WP7 a failure?". Difficult to say at this point. The silence of Microsoft and its OEM partners lead us to think that the results are significantly below their expectations. WP7 does not show anywhere in the market data released by the analysts. All signs point toward a disappointing start, although it is too early to call it a failure. Back in 2008, Android also had a very slow start before taking over the world in late 2010.

As far as the handsets and operating systems are concerned, I would say that it is as good as IPhone or Android. One can argue forever on the respective merits of the different systems but they are mostly equivalent. It took 3 years for Microsoft to wake up and deliver a good mobile operating system but WP7 is pretty good. The tile navigation is very smooth (disclaimer: I use a Samsung Omnia WP7) and very differentiating. The couple of features missing are not a big issue and more a check box issue for geeks. The clear weak point is the appstore. The content is much narrower and weaker than either IPhone or Android market place. I expect Microsoft to catch up in the future but as of now the gap is wide.

The reason WP7 is failing is actually much deeper and more serious than a couple of technical functionalities: it is the targeting. WP7 is clearly positioned as a pure consumer phone, integrating with Xbox, SkyDrive and other Microsoft consumer services. For professional usage, WP7 is significantly behind what windows mobile 6.5 could do. To give just one example: you cannot sort contacts per company! You cannot even search the company for a contact. These are extremely basic usage for a professional smartphone. On the other hand, you can connect to Xbox services and share your highest scores with your friends. By positioning WP7 as a pure consumer phone, Microsoft has cut itself from its core customer base and constituency: the enterprise and professional users. Microsoft is an enterprise company; more than 90% of its revenue (and 100% of its income) comes from enterprise and professionals. Another blatant example of lack of integration is the fact that you cannot connect WP7 to SharePoint 2007 that is still the version delivered in BPOS (the Saas productivity suite of Microsoft). Had WP7 being more focused on professionals, it would have had a chance of being unique on the market and leveraging the core strengths and channels of the core enterprise business. As a consumer solution, it has a very limited chance of out staging either IPhone or Android. IPhone is the cool high-end brand with the best appstore and the best music offering. Android offers a real ability to Mobile Operators to customize the user experience to their brand and services. It also allows producing the cheapest smartphones. WP7 is not the coolest product, not the best appstore, not the cheapest smartphone and not the most flexible for mobile operators: it will be tough to win the consumer war.

We'll see what the futures versions of WP7 bring. The alliance with Nokia could also change the game as Nokia will allow WP7 to, potentially, be running on cheap smartphones and leverage Nokia scale and scope. To be continued…

Frederic HALLEY

Mobile Operators hypnotized by Apple

 

I love Mobile Operators: they are some of the richest companies in the corporate world. In a little more than a decade they became behemoth weighting heavily on all economies across continents. Their services, mostly unknown 15 years ago, are used by billions of people. These companies are packed with many smart people who changed the way we work, interact and communicate.

What is very interesting is how these supposedly smart companies got hypnotized by Apple. If you remember the Jungle Book, you'll get the picture the same picture that I have of Kaa with his rolling eyes hypnotizing Mowgli. The whole story of Apple with mobile operators over the last 4 years is really how Apple managed to hypnotize the operators. Before getting to today's news which prompted this post, let's get back a few years ago at the launch of the IPhone. Back in 2007, Apple was a much smaller company producing Mac and IPod. The first version of the IPhone was a good product, different from existing solutions but with many limitations (weak camera, no multi-tasking, short battery life …). The genius of Steve Jobs was to convince Operators across the world to subsidize the handset at an unprecedented level and share part of their revenue. Operators were fine: cool products, very small volume for very high end customers. Not great for the bottom line but good for the branding. Interestingly, they made sure there was no direct competition on the market. In 2007 and most of 2008, Orange France would sell unlimited data plan only if you had an IPhone. When I asked the service agent why I couldn't buy unlimited data plan with Nokia, HTC or any other phone, the answer was approximately: "buy an IPhone". Not surprisingly, mobile browsing statistics were showing back then that IPhone users were using mobile internet much more ; well, having an unlimited data plan vs. paying 1€/Go does play a role too! Clearly, beyond product quality, operators were major players in the success of IPhone.

The IPhone was a success and the shipment went way beyond what the operators had in mind. Momentum set in, consumers got hooked on the products and its apps, as well as to deep subsidy Volume started picking up. What became apparent very quickly to all players in the industry is that the mobile operators were getting disintermediated from the payment value chain. They had created the most successful micro payment scheme with Premium SMS and later with other billing technology (IP Billing, Direct billing…). Of course, all that went away for IPhone users: you put your credit card in ITunes and you're done: no more billing through operators. Operators had kept their haircut on very high on operator billing: between 20% and 40% depending on country and many other factors. Of course, that significant tax limited, and still does, the growth and potential of operators billing. I remember interviewing an executive at a major European operator in 2008 on that topic. He was clear and disillusioned on the matter: yes they understood they were getting disintermediated but no they were not going to do anything as IPhone sales were helping the presentation of quarterly results. That is when I realized the hypnotization factor: the operators understood Apple's strategic objective was to transform them in dumb pipes subsidizing their handset but they wouldn't react and let Apple take the ball and run. I actually think most operators underestimated Apple and thought they were the ones in control. Actually, they were already under the spell and hadn't realized they had lost the customer relationship, the payment, the brand,… In one word, they had lost control.

The collision of news and announcement of the last 2 weeks is fascinating. Orange communicated how happy they were to be the number 2 sellers of IPhone in the world and that they'll want to continue pushing it. I would really challenge that this is good news for Orange. Considering how deeply subsidized the IPhone is, I wonder how long it will take them to break even with a modest increase in monthly ARPU. If you factor in, the added burden on the infrastructure due to mobile data traffic explosion, I really doubt this is good news for Orange's shareholder. Today, the French newspaper Les Echos published a great story on how Apple is ready to launch the sales of simcard and subscription directly via ITunes in partnership Gemalto. The bundled sales of handset with subscription would transform Apple in a MVNO pushing the disintermediation idea to its limit. Mobile Operators can focus on the maintenance of their antennas! The journalist ponders how and if the operators are going to resist. I think it is too late now: the momentum of Apple in mobile phones is amazing. The consumer awareness and demand is great. I am ready to bet that at least one operator per country will go with the new Apple model, forcing all the markets to go in this direction. It is a little late to wake up and realize what has been going on for the last 4 years. By the way, they have one great idea to counter Apple : push Google and Android. I am not sure Google is going to be soft and fuzzy and bow to their traditional ways… The mobile operators were the key winners of the 1995-2005 era, they won't be the winner or the decade to come.

Frederic Halley

Gemalto H1 Results analysis

Earlier this year, we commented on the acquisition of Netsize by Gemalto (read details here). As this post generated strong interest from our readers, we thought we'd followed up by looking at the Gemalto H1 results just published (available here).

The read is very interesting as Netsize is the elephant in the room in these H1 results: It is not mentioned once in the 17 pages document, however the overall financials of Gemalto seem to have been impacted materially by the acquisition. First the Software and Services group, where Netsize now reports, has grown by 48% to 110M€. That is an increase of 36M€ vs. 2009. Based on the latest information published by Netsize as an independent company, Netsize's revenue were either 90M€ (registre du commerce 2008) or 160M€ (press release). That means that the biggest part of the growth of the software and services revenue was driven by the Netsize acquisition. The Gemalto document also mentions that the acquired businesses contributed 38M€ to revenue in H1 and a loss of 2M€ to operational profit. As Netsize was, revenue wise, the biggest acquisition of Gemalto in H1, these numbers are mostly driven by Netsize. These numbers are also consistent with the information available on Netsize as an independent company.

What's the takeaway :

• Gemalto is incredibly shy for an acquisition that is clearly affecting their overall P&L
• Netsize does not seem to have benefited yet from the acquisition, as the results are in line with the last one published in 2008, even with a possible decrease of revenue over the last 2 years.

We'll see in 6 months what Gemalto will share on Netsize in its annual report.

Gemalto acquires Netsize and shakes the mobile payment sector

On January 5th, Gemalto (Euronext NL0000400653 - GTO) announced the acquisition of Netsize, the European leader in mobile payment and messaging. This event is quite significant for the industry but also for TiogaVenture. It is quite rare to see two of our major customers merge!

For the mobile payment and messaging industry (aka aggregators), it is finally a change in a landscape that had been expected to move for many years. As this sector matured over the mid 00's, consolidation was expected to reach the critical scale in a platform business with high fixed costs. The international leaders Netsize, Mblox, Sybase 365, Verisign and Ericsson IPX have been fighting for key customers across Europe and the US with a myriad of small players entrenched in one or two countries. 

M&A activities started last year with Verisign selling its mobile assets. However, the mobile messaging part of Verisign (formerly known as m-Qube) was left in the cold after the acquisition of the other mobile assets of Verisign by Syniverse. The acquisition of Netsize by Gemalto probably marks the end of independent companies and the era of the big technology group. All key players in this field are now part of a major technology group serving the mobile telecom industry - except Mblox.

In spite of some early comments, the acquisition of Netsize by Gemalto is not that surprising for a couple of reasons : 
- Gemalto was one of the initial investor of Netsize (though Gemventure, the then VC arm of Gemplus) and was still a significant investor in the company
- Gemalto's number one business is the mobile telecom industry. It falls in a related category to the Ericsson, Syniverse and Amdocs who are now the key players in the mobile payment and messaging space.

The open question for Gemalto, and the other major players, is how they are going to innovate and change the game in a field where the SMS domination is fast eroding. The new dominance of Apple in this market is strongly challenging established player by dis-intermediating the payment role of the mobile operator.

To see the official press release, you can check the Netsize website here (English version) or the Gemalto website here (French version).

 

 

Mobility update at EBG conference

Last week was the first post summer mobility conference of EBG. As usual, a good roaster of speaker with representatives of key players (Microsoft, Nokia, Orange) and some start-ups (Goojet). Market data provided by Comscore / Mmetrics.

The mood was pretty upbeat which feels good in the current economy. The elephant in the room was Apple - no representative in panel ... - with speakers trying to either capitalize, explain or compete against the Iphone tectonic shift.

Some interesting figures provided by Comscore :
    - 77% of Iphone users have apps on their phone (vs 36% for other smartphone users)
    - 85% of them browse the web (vs 52%)

There is clearly some self fulfilling prophecy as operators have pushed unlimited data plan with iphone first. Only recently have they started promoting these plans for other smartphones. Getting hit by a 100€ data cost over a month for browsing makes you rethink your usage pattern! (I can testify on that one)

Nicolas Petit from Microsoft was very upbeat about the soon to come launch of Windows Phone (aka Windows Mobile 6.5). Based on everything I have read and heard from Microsoft people, it is difficult to get as excited as he is. The 6.5 is not expected to get even close to iphone ease of use. That could be with Windows Mobile 7 in a year or so. More than 3 years behind Apple... On the positive side for Nicolas, France is where WM has the highest market share with 26% of smartphone.

From the Nokia side, Bertrand Dupuis was covering the different strategies and initiatives. Much expectations on the N900 on Maemo. That could overcome the slight disappointment on the N97 that has not been the expected Iphone killer. OVI has been somewhat slow to take up. Let's wait and see how it goes.

Back to Apple and the appstore. The 2bn downloads has just been passed recently. That means the current trend is close to 11 million downloads a day! However the top 20 downloaded applications are all free. The major paying category are mobile games far ahead of anything else. That makes me wonder even more why Nokia was never able to pull it off with Ngage which started earlier with the right games.

To conclude, I fully agree with Guillaume Decugis (Goojet) analysis on the importance of the iphone. Why is the iphone so important and so good? yes, the handset is good, the data plans offered are the right ones but more importantly it is a great distribution channel. It improves all steps of the buying process on mobile (discovery, payment, delivery, recurrent usage). In the mobile space, we were missing a great mobile only distribution channel, reasonably cheap and not fully dependent on the operators. Apple has shown the way. Let's see what Microsoft and Nokia will do.

Frederic Halley

Mobile monetization

Tuesday, I was attending the Electronic Business Group session on mobility (http://www.ebg.net/mobilite/). Some of the most interesting discussions revolved around the current business models on mobile - ie how do you monetize an audience / can you build and sustain a business on a purely ad-funded business model. On the web, this debate has been mostly settled ; not so much on the mobile. Most interesting point was the consensus among the panelists that mobile advertising market was worth 15M€ euros in France. Knowing that 2/3 of that is advertising done by telemedia to ultimately sell good via SMS premium, that give you a pure advertising market of 5M€...

On the other hand, the SMS premium market is worth a little south of 1bn€. If the web is any indicator, advertising is destined to grow significantly. However, it will take a few years before the SMS premium loses it is place as the best way to monetize on the mobile.

Frederic