When Apps Attack: Industries Under Pressure

Updated March 27, 2013, 7:59 p.m. ET

When Apps Attack: Industries Under Pressure

By GREG BENSINGER

The mobile-apps industry is still in its infancy, but it is already taking on giants.

Apps are cheap to make and easy to distribute, forcing many old-line industries to rethink the way they do business.

With a single click, millions of Americans are comparing prices, hailing taxis and downloading addictive videogames to their smartphones.

“You don’t have to be a huge company with billions of dollars to build a business anymore; you really can be two guys in a basement,” said Jeff Haynie, chief executive of Appcelerator, which licenses software for app developers. “Very traditional models are getting disrupted.”

That trend is set to continue as more consumers switch from simple mobile phones to smartphones that spur app consumption. Last year marked the first time more U.S. mobile phone users had smartphones than simpler feature phones, according to data from comScore Inc.SCOR -0.24%

Here are four industries under pressure because of the rise of apps:

Retail

Amazon.com Inc. AMZN +1.92% solidified the concept of “showrooming” in 2011 when it introduced its Price Check mobile app, which allows people to compare store prices with online prices by pointing their smartphone at a bar code.

It has since become a phenomenon, as more consumers use big-box retailers and other stores to test out products, only to buy them cheaper online or directly from their phones.

Other such apps have followed, such as PriceScan and eBay Inc.’sEBAY -0.04% RedLaser. The free apps have become more sophisticated, including directing users to nearby stores with lower prices and offering coupons and other rebates.

At Best Buy Co., BBY -2.42% more than three in five consumers now use their smartphone to comparison shop, up from about one in 10 two years ago, according to a recent survey from consulting firm Kurt Salmon Associates. And Alix Partners found last year that 33% of consumers made a purchase online after first looking at an item in store.

Not all the apps turn business away from bricks-and-mortar stores. RedLaser can also display prices for area retailers, sending a user from, say, a Wal-MartWMT +0.01% to a nearby Target TGT +0.64% where an item may be cheaper.

Retailers are trying various approaches to thwart showrooming, including stocking exclusive items, dynamic pricing schemes and price-matching. Last year, Best Buy and Target Inc. said they would match rivals’ online prices year-round, though the efforts have been plagued by onerous rules and exceptions.

Brookstone Inc. Chief Executive Stephen Bebis says the company was forced to change strategy to combat showrooming by app users. Brookstone, known for its electronics products, has increased the number of house-branded and exclusive products to prevent itself from becoming a showroom for lower-priced e-commerce retailers, for instance.

“Sixty-five percent of our sales are now our own products,” said Mr. Bebis. “I’m not sure there would be a Brookstone today if we hadn’t done that.”

Taxis

Apps for sharing and arranging rides have thrown a wrench into the engines of traditional black car and yellow cab services, which are an $11 billion industry.

With names like Lyft, SideCar and Uber, the apps promise cheaper and more efficient service by connecting drivers with passengers using Global Positioning Systems embedded in most smartphones.

“In most parts of most cities it can be very difficult to hail a cab,” said Justin Caldbeck, a partner with venture-capital firm Lighspeed Venture Partners, which invested in SideCar. “Now there’s an ability to push a button and have someone come to you, and you can see where they are on your phone and when they’ll actually get to you.”

The free-to-download services work differently. SideCar and Lyft mobile apps rely on drivers who use their own cars to shuttle customers around town after work, on weekends and, in some cases, as a second job. Uber and the smaller TaxiMagic work with existing taxi fleets and function more like a traditional dispatcher, though with fares that can run higher.

The apps companies have faced regulatory pushback, including from the California Public Utilities Commission, which said the apps skirt taxi and limousine rules. The CPUC is reviewing the companies’ business practices, while Philadelphia’s Parking Authority has issued fines to SideCar. In Chicago, Uber has faced a lawsuit from taxi drivers.

Sunil Paul, CEO of San Francisco-based SideCar, said the new services are misunderstood. “I think we will all look back on this and see it as a transformation,” he said. “It wouldn’t be the first time that incumbents use all at their disposal to protect their turf.”

While the services generally operate in just a few U.S. cities, they are expanding rapidly. Lyft started service in the Los Angeles area this year and will soon bring it to Seattle, while Uber recently began operating in Singapore, adding to locales in the U.S., Europe and Australia. SideCar this year is adding various U.S. cities such as Boston and Washington.

Videogames

The rise of apps has caught the $15 billion U.S. videogame industry flat-footed.

The industry grew up selling game consoles and cartridges for people to use in their living rooms and basements, tethered to a television. And while videogames are also played on desktop computers and portable consoles, most game publishers were slow to embrace the small screen of the mobile phone.

New mobile games like the popular “Angry Birds” and “Cut the Rope” are low cost, typically 99 cents to download, or free with advertising support. Users could carry dozens of games with them on their smartphones and not face the added costs of buying new cartridges or CDs.

These businesses don’t require the infrastructure that traditional game companies need, such as retail space for cartridges and consoles, as well as the cost of packaging,

Consoles typically cost $200 or more, and many shrink-wrapped videogames cost $60.

Spending on packaged games remains strong, but the gap is closing. Last year, packaged games sold in the U.S. totaled $7.1 billion in sales, down 21% from a year ago, while spending on purely digital content such as mobile games and in-app purchases jumped 16% to $5.92 billion, according to market researcher NPD Group.

Even new game makers like Zynga Inc. ZNGA -0.30% have been tripped up by the apps trend. Zynga rose to prominence by offering social games like “FarmVille” onFacebook Inc.’s FB +3.51% website. But following its December 2011 initial public offering, Zynga’s shares have plunged over concerns the company was overdependent on Facebook and was weak in mobile games. Zynga’s shares are down more than 60% from its IPO price of $10.

“Zynga has always been aware of the power of mobile,” said Travis Boatman, Zynga’s senior vice president of mobile. But “the size and speed of the mobile business has been tremendous, more than anyone expected.”

Wireless carriers

A number of texting and free- or low-cost calling apps–notably WhatsApp and Skype—have rankled wireless carriers that for years relied on the services for the bulk of their revenue.

Texting, in particular, was tremendously profitable for carriers as more users turned to the short messages in place of phone calls or emails. By some estimates a single text, which may cost as much as 20 cents to send or receive, costs the carriers themselves just one-hundredth of a cent.

The rise of texting apps has taken away $23 billion in revenue from carriers as of the end of 2012, according to market research firm Ovum. That will more than double through 2016 to $54 billion.

Imo, a Palo Alto, Calif., free texting app, said it processes 50 million text messages a day from two million active users. “Texting using an app is just a better experience for users,” said CEO Ralph Harik. “The wireless carriers I don’t think realized soon enough that there was a better way to send text messages.”

Chris Larsen, a Piper Jaffray analyst, said the free-texting app on iPhones had possibly the biggest impact on carriers’ operations. “It forced them all to go to unlimited texting plans, as part of the regular contracts,” he said.

Spokespeople from Sprint and Verizon Wireless declined to comment. An AT&T spokeswoman said “consumers want simplicity and overall value, which is why we offer unlimited voice and text.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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