e.Digital Corporation (fka EDIG)

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OT-Upwardly mobile: HP and mobile e-services
Special Guest Star: John L. Chapman, Director of Strategy and Business Development, e-Services Solutions, Hewlett Packard
April 2002

We had the great privilege of spending some time speaking with John L. Chapman, HP's director of strategy and business development, e-services. Chapman has over seven years of experience working with the telecom sector developing partnerships for enterprise customers. At the same time, he has been working on his doctorate at the University of Georgia in Business.

Chapman discussed how wireless impacts the strategic development of e-services, something he has been thinking a lot about over the last two years with his involvement in several strategy development projects at HP. "My group is set to be the vanguard in leading these technologies," weaving together "a little bit of the think tank aspect to it with the real world perspective from our partners."

Chapman cited HP boss Carly Fiorina's view that "we are entering the era of services." Chapman said this is true for mobile services. As well, Chapman recalled Bill Gates' theory of exponential change and his belief that "the next ten years will be more profound than the last fifty."

Chapman said that it is his belief that we are in the midst of a third industrial revolution - the first was in the 1740s; and the second in the mid-19th century when modern railways and communication facilities emerged. "Today we're in the third industrial revolution and the macroeconomic statistics bear this out. Economists who study growth can no longer capture the change, it is happening so fast. It's hard to imagine productivity - and mobile and wireless investments are right in the fulcrum of these. It is really an exciting time!"

Chapman said that as a consequence of this period of revolutionary industrial change, last two years have "been a roller coaster in our industry!"

And, at HP, he said, "We are making major [wireless] investments to be, in essence, a better company - and our ability to succeed as a company in the future depends on how well we do in the mobility story." Chapman added, "Either grow in mobile e-services, or die!"

He elaborated: "The U.S. economy, and indeed the world, is at an historic inflection point. There is a boom in productivity, lower cost structures, and hyper-competition is at hand. The era of digital communications-based services has begun. Companies must come to excel in mobile e-services solutions offerings, or die a slow death in the marketplace. In spite of all the hype - in the next 5 to 7 years, with the advent of 3G networks and as the ability to provide mobile e-services grows with the enhanced mobility, wireless will become a key component of any company's value chain, a key topic or strategy for the development of any company."

That's heavy stuff! But also encouraging, given the tumult of this past year.

And in spite of the tech collapse that started in the spring of 2000 and "never really ended," Chapman observed that "as far as we've fallen now, we still see the viability of the leverage potential of mobile and wireless technologies." Growth, he said, will depend on the ability of companies to leverage "intangible and information based services which are seeing profit margins grow. Just like they used to say at IBM, 'Sell the hole, not the drill!' We want solutions pre-fabricated. In our own industry and several related industries - for example, even in the dishwashing industry there will ultimately be an embedded chip in that dishwasher for routine remote maintenance and service - it will become augmented products with services that are information-based. We think this is an inexorable trend, and should be considered as you develop your strategy."

Referring to economist Joseph Schumpeter, who Chapman said described capitalism as the embodiment of a perennial gale force of economic destruction, Chapam explained that transaction costs are ultimately reducible to knowledge costs. "The specific and direct application of mobile and wireless technology is obvious - with information at my finger tips, I lower the cost of useful and relevant information."

"When I see a billion cell phones world wide, the market for wireless services will be huge! Though the studies are all over the map - and could be true or false within a factor of 40 to 50 percent - we are nonetheless going to see huge growth in mobile. We are going to see high growth rates in spending in all things related to mobility. The growth of overall cellular and wireless technology will continue to be voiced based, but we will see a ramp-up of mobile data services too."

Chapman said that at HP, "We drew up a list of how Internet related technologies and especially mobility will change the various parameters inside companies - one of the equations of market power will shift toward consumers from producers. Obviously, mobility will have a big impact on how organizations are managed and governed. And one thing to say about wireless - barriers to entry are lowered in all ways. Wireless lowers knowledge costs across the board."

Key success factors that Chapman believes companies of the future in all industries will have to get right are: "intangible assets, speed and agility, degree of networked connectedness, customer focus, and knowledge differentiation."

Chapman said HP is practicing what it preaches - finding itself at what he called "the unique intersection of always-on infrastructure, appliances and mobile e-services. Over the next several years, a lot of companies will position themselves to act as the glue to bring it together - providing end-to-end infrastructure, apps and ubiquitous access to the next generation of services over a global communications network."

Chapman said that "HP envisions a new mobility experience. Where we are headed is providing a very solid offering or platform for mobile services, so every device, every human being has a URL, a registered place on the Internet. As an individual moves from place to place with his appliance, a range of context-specific offerings are made known to that device and delivered in proactive manner to the user. For instance, you can take your kids to an NFL stadium, walk into it - as a destination, it is a closed environment, and it will form an envelope of services dealing with that specific experience."

Chapman asks, "What will be the impact of wireless technology as they move through our value chain? What will be the possibilities of wireless?" To assess this, Chapman said, you need to ask, How does or could wireless affect the business' eco-system? What will wireless and mobile technology do inside my company? Specifically, he said, the first focus should be on customers, then prospective customers. Do technical issues map with business drivers compelling this technology? The big issues, Chapman said, are localization such as context-specific services, personalization, and immediacy. "Ultimately, everyone will have a Web presence, and services will ping off these: localization; personalization and immediacy."

To illustrate localization, Chapman talked about one of HP's largest customers, GM, and its telematics service. "GM is making huge investments in telematics. This will be a huge sector, worth multiple billions of dollars in its own right."

To illustrate immediacy, Chapman discussed online trading such as that provided by e*Trade. And to illustrate personalization, he discussed context-specific services in a closed environment destination like a sports arena.

Chapman said "you need to think through the degree that mobility matters" before you make your own investment in the technology. "I always encourage people to do WCGW analysis: What can go wrong? It's a cost-benefit analysis. Clearly, in the next few years, bandwidth is going to explode - in Japan this will happen next year, but here in the U.S. it will happen after that. At HP Labs in Palo Alto, we're doing pure R& D - and we made a three year commitment with NTT DoCoMo to develop prototypes for 4G protocols. This is the world we are heading to a few years away - where you can download the whole movie version of Gone with the Wind."

Some issues to consider in preparing for this higher bandwidth future, are: "Bandwidth, physical form factor, application 'content' and serviceability, security, and supporting software and middleware. These issues map to specific applications such as e-mail, SMS/paging, Internet and extranet access, broadband/multimedia, file transfer, and so forth."

To avoid common pitfalls faced by early adopters, Chapman recommends that you consider what he calls "the strategic relevance - if you do this clearly, you avoid 99 percent of the problems early adopters face, who invested money in wireless technology for the sake of it. Enunciate the strategic relevance of wireless technology to your business model." Chapman added, "design and plan for user friendliness and security." And don't forget that "billions of dollars in legacy apps must be extended to wireless - this is non trivial, and middleware technology firms will make a lot of money in the years ahead, this is a very complex problem!" Chapman also advised to "ensure bandwidth is enough," and to "beta test on a limited basis" before deploying. "It's not a bad idea to go through a list of the apps your are trying to bring up and map them to your business needs. Ultimately, the marketplace, the technology sector, will be guided by how this hand plays out, and whether we will see this so called hockey stick, a real explosion in wireless, or not."

Chapman said to use the 5-C scorecard, measuring Context, Clarity, Content, Coordination and Cost: "Understand the big picture, understand your scope, prioritize and understand the most compelling content you want to deliver, understand the wireless touchpoints, what are the implications for your other technology investments? And lastly, understand the element of cost - both hidden and not hidden, try to capture them all. This is the headache piece of it, there's no easy answer to this, no quick and easy - it is much harder and important to go through the exercise."

Chapman presented four detailed case studies of wireless deployments. He started with E*Trade, which "built themselves the largest online financial institution, showing terrific growth - and were until recently profitable. It's a very successful story, they have managed to build a very credible brand name in their sector and announnced last fall the extension of various E*Trade services to mobility and announced with the greatest of fanfare, making a big splash into wireless by supporting all WAP phones. They had several thousand customers sign up and utilize their wireless service - offering wireless banking and brokerage services."

Chapman said, It is indisputable that this is where the e-banking and financing industry is heading today - it is all going to wireless." Chapman used the 5-Cs to grade E*Trade. "From context - they really nailed it, they studied what they wanted to do and hit it - they understand where their industry is going; for coordination - enabling wireless enablement and connecting to existing wireline services was well thought out; cost - their decrease in call volumes saves money; clarity - as an early adopter, with content there are certainly limitations with physical form fctor and bandwidth limitations with what we can do in the wireless mode. E*trade knew that in the long run, this is where this thing is headed it was important to throw money at it and get into the game. It makes customers happier and more loyal."

Chapman also examined the case of Citibank in Latin America. He noted that Citibank is the largest financial service company worldwide, and a huge presence in Latin America, with millions of customers. Wireless, Chapman observedl helped Citibank to deepen its customer relationships by offering a full rage of transactions services; keeping the environment as high quality as will allow; "every one else in the industry is going to go this way, we ought to be a leader, we ought to be first! Wireless brings the ability to offer a full range of customer needs."

Citibank realized, however, "that the market was not mature enough - they really wanted to move forward real rapidly where they know the industry s headed - but they did a What Can Go Wrong analysis and decided not to rush head-on and offer everything in a One Stop Wireless Shop - instead they decided to invest in proven services that were already successful in other markets. This allowed Citibank to remain on the cutting edge of technology while avoiding the problems of unready technology - stepping into this incrementally on a limited scale and managing its investment as we move forward, selecting just a few applications - including the ultimate killer app - email and instant messaging. Customer acceptance is seen to be very accepting."

Chapman noted how Citibank scaled back its investment "after a close examination of the costs and limitations - including physical form factor and bandwidth issues. I like the manner with which they stepped into wireless."

A third case study presented by Chapman was Driver Net, which provides drivers with various services such as 2-way communication, dispatch and tracking, load matching and low cost driver communication. "This should be a guaranteed suvcess, right? The trucking industry has a high fixed asset base, and less than truckload (LTT) loads just don't make money. It is key to keep those assets loaded. This is a great concept and I have nothing but respect for entrepreneurialism and risk capital. But this would be a case of investing in wireless technology for the sake of it. In Drive Net's case, various competitors as various network operators built out their own networks in the U.S., and coverage is better in some areas than other. They went down a given technological pathway that had less than reliable architecture. National wireless coverage was a big issue; don't lock yourself into a single device or protocol - there is a significant interdependence between infrastructure, applications and devices." Chapman concludes that "this company probably could have benefited by a WCGW analysis!"

The fourth and last case study presented by Chapman was Progressive Insurance, from Chapman's hometown of Cleveland. Progressive is "an insurer and also a leading edge information company. Its key to success is the actuarial analysis of its customers, to assess risk. They were able to pick and choose their various segement populations - for instance, they found safe groups within the 18-25 year old drivers who were lower risks - such as those who have PhDs in statistic! It's a great story, and Progressive was an early adopter and heavy investor in information technology so were very predisposed when the wireless wave came along last year, to think about how they can use wireless. They marketed the Autograph - a wireless mobile app that provides GPS tracking to monitor mileage and where cars are driven, and at what time of day; enabling mobile customer access to policy information and claim services - hence providing intelligent feedback from customers. It also has bill payment functionality."

As Chapman pointed out, "you're less likely to get into an accident driving through an Iowa cornfield than on the Interstate," and this sort of mobile feedback and location sensitivity allowed Progressive to "develop a better and better database of risk." At the same time, "Progressive saw its customer relationship improve - its personalized portal let customers go in and see his or her record, their whole history of driving that vehicle and relationship with Progressive." Chapman noted that Sprint "has joined into a partnership to offer over their network this Autograph - a stage one development in telematics, and they are able to gather all this information on drivers to have ever more fine tuned pricing of risk. They have made significant investments, since being announced last Fall - and the return has not been there to justify what they are spending today, there have been only a limited number of registered users since September 2000. Progressive must carefully examine the cost/value of being first - is there still a first mover advantage (like there was with Coke as it expanded around the world)?

Chapman noted how the "Internet is the Great Leveler," making it "less expensive to acquire information: so what is the risk of being second to market? Be careful not to let the promise of great cost savings cloud your assumptions on user adoption; make customers the center of your wireless business case." In the end, Chapman said it is "important to understand what the customer wants." The 5-Cs provide "good coordination!"

Chapman explained that justifying your investment in mobile wireless technologies requires doing the following: "it needs to be analyzed in terms of incremental revenues and costs; utilize Porter's 5Cs to gain relevant cost/benefits; start with the right goals - measuring Context, Clarity, Content, Coordination and Cost; re-emphasize clarity - what is the mobile wireless proposition?; understand the trade-offs; and don't forget that being a 'second mover' in Internet technologies is not a bad thing - with the boom and then bust and now the settling, today it is certainly less costly to be a follower!"

And, Chapman cautions, "avoid the pitfall of wireless investment for the sake of wireless investment just because it is the latest and greatest thing. Remember that a dollar invested in A can't be invested in B."

Chapman concluded that: Mobile wireless is indeed real and the "next big thing," so be aware of emerging benefits. "Expect the 'boom' to come in 2003 and 2004, and follow your customers' lead; don't forget, however, that business fundamentals have not been negated! GAAT accounting principles have not been negated! There are some huge and obvious benefits attendant to wireless business development; 3G and ultimately 4G are coming to the US, all the major telecom operators around the world have spent billions, and the infrastructure will be in place for quicker, faster, better networks. "Plannin today for tomorrow is like motherhood and apple pie: always think first about the customer or the channel player, since ultimately they are your source of revenue!"

Chapman concluded his presentation with some inspirational and thoughtful quotations from some of History's most well known strategists:

Virgil: "Fortune favors the bold."
Sun Tzu: "Attack at dawn..."
Carl von Clausewitz: "...Concentrate your force structure so as to inflict overwhelming violence on the enemy at the point of attack."
Winston Churchill: "I felt as if I were walking with destiny, and that all my past life had been but a preparation for this hour and this trail... I was sure I should not fail."

Chapman noted that HP, like Churchill, is similarly walking with destiny as it confronts some hard truth of the current industrial revolution. "Technology profits are changing - based on enterprise demand. E-service revenue streams must grow dramatically for the industry to prosper. From 2001 to 2005, the four year trend is downward in hardware and software revenues and gross margins; but upward in services in revenue - from 3 to 30 percent of HP's total revenues, with gross margins around the same, between 25 and 60 percent. Hardware as a portion of HP's revenue will decline from 50 to 40 percent from 200 to 2005. Software will decline from 40 percent to 30 percent - highlighting the importance of services to HP revenues. Gross margins of both hardware and software are both trending down in the industry."

Chapman's conclusion: "Increasingly, HP must look to offer e-services - and mobile e-services."

Chapman cited Bill Gates' prediction: "The Internet era now being ushered in... promises more changes in business and society in the next ten years than in the previous fifty combined." Chapman adds: "More changes are coming in the next ten years than in the previous fifty - your company must deal with this new reality, and mobility-based productivity growth is critical."

- Margins in traditional products and product-centric solutions will continue to decline - so value-added services become more of a focus and imperative.

- The lowering of transaction costs in all business activities guarantees the proliferation of new business models - so scale becomes harder to achieve, solutions with integrated services become more important, disintermediation and partnering will grow, and information-based services which offer high (but intangible) knowledge content will offer highest margins.

Chapman believes that "other industries highlight opportunities for capturing competitive control points via new technologies and processes." He cites Food/Beverage giants Coke, Pepsi and Phillip Morris; Technology/Manufacturing leaders GE and Dell; Financial Services heavyweights Bank of America, Progressive Insurance, and GEICO; Pharmaceuticals giants Merck and Eli Lilly; Retail king Wal-Mart; and E-Commerce innovators Amazon, E-Bay, AOL and Yahoo.

Mobility, he adds, "drives a 'new' theory of the firm." Chapman makes some predictions:

- "Within the next decade, there will be more wireless than wireline subscribers in the world: Key applications for the enterprise include: unified messaging, location-driven e-services, and mobile commerce."

- "Key successes for the enterprise in the new economy are: intangible assets, speed and agility, degree of networked connectedness, customer focus, and knowledge differentiation. The role of e-services in the modern era underlies the dynamism of the 'new economy.' The winners from the 1990s prove both strategy and execution matter re: speed, connectivity, intangibles - this is what mobility provides."

- On the shakeout, he asks: "Companies delivering e-services not so long ago had higher market valuations - was this all hype?" In the second quarter of FY 2000, Chapman noted the following comparative market caps:
AOL: $143 B v. Time Warner: $74 B
Schwab: $29 B v. Merrill Lynch: $25B
Yahoo: $83 B v. NYT: $8 B
Amazon: $22 B v. Barnes and Nobles: $1.6 B
E-Bay: $1 B v. Sotheby's: $1.5 B
Priceline: $9 B v. Marriot International: $8 B
Ariba: $15 B v. Peoplesoft: $5 B

Such valuations, in hindsight, seem absurb! But they do reinforce the notion that the market - and the millions of people who drove those markets and defines their sentiment, had high hopes for how new technology was going to transform business.

Chapman closed by observing how HP's mobile strategy is shaped by its unique position "at the intersection of always-on infrastructure, appliances and mobile e-services." As a company, it is embracing wireless technology and mobile solutions because of their profound and transformative influence on our economy and society. A revolution is happening; HP intends to not only survive the revolution, but help to define it, and as we all move forward, to provide solutions that can meet our needs in this complex and challenging period of change.
http://www.wirelessreport.net/wirelessinsiders/april02/upwardlymobilehpandmobileeserv.html
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