By Dovell M. Bonnett, President K-Vell Electronics
and Kendra R. Bonnett, President Mark Stevens & Company
Introduction
Chip cards are tomorrow's computers. This is the message of organizations
like Global Chipcard Alliance, Smart Card Forum, Smart Card Industry
Association, OpenCard Consortium and other industry forums and consortiums.
This leaves plastic card manufacturers asking, "What will be the
impact on our business? What new expertise will we need? How do we develop
a business case?" Here, and in the pages that follow, we have some
suggestions and recommendations that may help answer these and other
questions.
When a company enters into an emerging market, there's little established
statistical or marketing data upon which to build a business case. A
company can only draw comparisons and strategies based on the experience
of other industries. We call this modeling. The trick is to find an
industry similar enough to be of value.
Building the business case
Building any business case requires an individualistic, company-focused
perspective put together during several months of investigation, analysis
and introspection. Some of the company-focused topics include sales
objectives, revenue requirements, branding, promotional campaigns, budgets
and timelines. Thinking through each of these topics is paramount to
building a winning business case, and requires each company to apply
its unique, internal knowledge.
With this information in hand, a manufacturer is ready to begin the
modeling process. Modeling starts with the high-level arguments that
help manufacturers determine the path that will best meet their vision
and core competencies. While not a comprehensive list of modeling issues,
we've chosen to divide the process into five key steps:
- Picking the model
- Learning from the historical perspective
- Selecting your product(s) and services
- Building a market structure
- Performing competitive analysis
Picking the Model: What industry best represents the issues
faced by the chip card industry? While some analogies can be drawn from
the personal-digital-assistant (PDA) industry, cellular-phone industry
or even the Internet business, the chip card best matches the personal
computer industry. The business strategies, technology options and infrastructure
requirements faced by PC manufacturers are similar to what chip card
manufacturers face today.
Chip cards today lack a standard operating system. The majority of
the systems are proprietary, which means there is virtually no interoperability
between the cards of one issuer with the system of another issuer. Although
organizations are trying to address these issues, there are still many
unresolved infrastructure standards that are not likely to be resolved
for several more years. Boutique companies are all looking to gain market
share and grab leadership for themselves. And many large corporations
are still trying to understand how chip cards will help their business
revenue stream. These are only some of issues faced by the chip card
industry today, similar to the early days of the PCs.
The other advantage of modeling one's business case on the PC industry
is that there is a long enough history from which to draw references.
Learning from the Historical Perspective: By exploring the history
of the industry being modeled, a company can learn what business techniques
worked in different regions and why. By identifying a comparable point
in the model industry, a company then can extrapolate to the emerging
industry to develop a realistic timeline from development to maturity.
In the case of chip cards, manufacturers should be looking at the issues
the PC industry faced in the mid to late 1970s and the very early '80s.
Some of these are listed above.
Next, the manufacturer needs to evaluate the history of the emerging
product and use the model to figure what may happen in the months and
years ahead. This perspective is particularly valuable, for example,
if the card manufacturer wants to expand into a region already primed
for the technology (i.e., Europe) or contribute to the development of
a new market (i.e., North America). By understanding a region's issues,
the card manufacturer can better determine volume, product requirements,
timeline for acceptance and potential return on investment.
Selecting your Product(s) and Services: Modeling helps companies
identify the best products and services to offer and how these match
with their current infrastructure. For example, the experiences of the
PC manufacturers tells us that the more a manufacturer puts its products
into the hands of consumers (end users) and other developers, the more
service and support will be required. Take the case of Microsoft. Every
time it releases a new or upgraded product, phone calls flood its technical
support lines-to the point that customers may have to wait more than
an hour for an answer that takes 5 minutes to resolve. If Microsoft
decides it doesn't want customers to wait this long, the company hires
additional staff and equipment to handle the load, which, in turn, encourages
more people to call and again the wait grows.
Card manufacturers need to be prepared for the same experience. They
need to make their product decisions based upon their capacity and willingness
to meet customer expectations for services and support. This is probably
the most difficult-and most important-phase of building the business
plan because it requires a company to assess the trade-off among the
market applications it envisions, the technical expertise it has today
or is willing to invest in, and the profit margins it expects. The next
two diagrams illustrate a way to clarify the industry requirements.
Table 1.
Table 1 shows some of the application requirements, while Figure 1
identifies some of the technical components required for two types of
chips (memory and microcontroller).
Figure 1
After a card manufacturer has identified which product(s) it wants
to offer for its preferred industry, the next step is to understand
what services a customer will expect the manufacturer to provide and
the level of technical competency required. Figure 2 demonstrates that
as the technical competencies increase so do the services a customer
requires.
Figure 2
Let's take Figure 2 apart and analyze it by phase to understand the
services and technical expertise required:
Chip embedding: This business requires sophisticated manufacturing
equipment and embedding technical know-how. But from a comparison perspective,
this business requires the least amount of advanced computer technology
skills and customer service. The customer will expect:
- High quality control and standards conformity
- Fast delivery
- Low costs
Some customers may require blank white cards with no graphic requirements.
A company that wishes to play at this level must build a commodity-based
business case large enough to compensate for the low margins on the
individual cards.
Application Development: Application development can include
anything from pre-loading cards with a stored value (similar to today's
phone cards) to writing an advanced multi-application program on a cryptographic
card. The technical knowledge includes software programming, memory
management and microcontroller architecture skills. The customer will
expect:
- Card personalization
- Bug-free applications
- Technical support center
A company that wishes to participate at this level has added-values
products that will produce higher margins that can help offset the higher
service expenditures and lower volumes.
Operating System Development: Writing operating systems can
result in many additional products and services. Since the operating
system most likely will be proprietary, the card manufacturer will be
expected to develop application(s) and have a working knowledge of many
different terminal and reader devices. Should the manufacturer also
want third-party companies to develop applications, it will need to
provide the necessary tools, manuals and training to support developers.
The customer will expect:
- Software development kit (SDK)
- Software libraries
- Technical support, user manuals and training
- Multiple terminal and reader knowledge.
Any company building a business case for this effort can expect even
higher margins, as well as higher service expenditures and lower volumes.
System Integration: Although this level of business can generate
the most revenue, it also requires the greatest degree of customer service
and technical expertise. This business model is similar to that of computer
manufacturers like Compaq, Apple, Dell Computer Corporation, IBM and
others. The customer will expect:
- Easy to use, bug-free software and hardware system
- Specific industry knowledge to meet consumer needs
- Additional systems, computers, software and interface knowledge
- Customer support, technical support, training and repair service
A company will enjoy the highest margins and keep the lion's share
of the profits, but it also will incur the highest service expenditures.
Determining a company's products and services is not only a difficult
process; the decisions made in the past must be constantly reviewed
and modified to meet changing market demands. Management needs to gather
information from manufacturing, marketing, sales, top managers and key
customers to best determine products and services that will provide
a profitable return on investments.
Building a Market Structure: Modeling assists a company in identifying
the best market segment to enter. Some business owners will decide to
pursue vertical markets, others will target horizontal markets, while
a few will even go after both. Again, looking back at the PC market
will give them a better insight into where the chip card market is today
and where it may be heading.
In the past, computer companies were vertically aligned. A single company
would choose or design a proprietary microprocessor chip; develop a
computer system around the chip; write its own operating system (or
hire someone to write it); create its own application software; and
license the technology to other software programmers for a hefty fee.
It wasn't long, however, before the computer industry began moving to
a more horizontal structure. Apple, for example, was among the first
to encourage third-party developers of peripherals and applications
to create products for the Apple II series.
The industry's market structure really became commodity oriented when
the market developed for IBM PC clones. Today consumers are not tied
to proprietary systems from a single supplier. They can mix and match
off-the-shelf microprocessors, hardware, operating systems and application
software from many suppliers thus creating a consumer-specific computer.
Once a card manufacturer identifies its products and services, it needs
to determine the best market structure. In general, the more products
and services a chip card company offers, the more vertical its alignment.
The more open and flexible the products and services, the more horizontal
the alignment. In the resent past, Gemplus, Schlumberger and G&D
have modeled their business more along the lines of the earliest PC
manufacturers who tried to provide everything to everyone and not encouraging
the third-party markets to develop. In order for the market to grow
and prices to come down and turn chip cards into commodity items, they
probably will need to build systems around the best solutions the industry
at large has to offer.
Performing Competitive Analysis: It practically goes without
saying that no business plan is complete without an analysis of the
competition. Again modeling can help us identify potential threats that
a company might never identify otherwise. For example, throughout the
1970's, the mainframe (and to a growing extent the midrange system)
was at its peak-the unchallenged choice of corporate America. PCs, on
the other hand, were seen as machines for hobbyists and no threat to
the mainframe. Even IBM, when it came out with its first PC, never envisioned
a threat to their mainframe business could come internally, yet alone
from Apple, Compaq or Sun.
The competitors of the established and existing card manufacturers
are easier to identify and rank their threat-especially with the PC
industry as a model. On the other hand, the threats from non-card manufacturers
are more difficult to identify and predict. This also makes them the
greatest threat since they are typically overlooked or dismissed until
late in the game. The following, however, represent some of the potential
non-card competition to watch:
- Semiconductor companies
- Semiconductor die encapsulating companies
- Floppy disk manufacturers
- New start-up business
What the future may hold
Using our modeling approach, we can follow the technology's development
path, making assumptions about today. But what can we say with regards
to predictions for tomorrow? In the first place, modern technology enables
companies to offer far more goods and services, faster and cheaper than
ever before. Digitalization of information has attributed to this growth,
but it has also burdened the consumer with far more information than
he or she can effectively manage. Through this rapid growth, we seem
to have lost one of the basic principles of technology: Machines are
dumb and humans are intelligent.
In the early days of computers, people could meet a machine's needs.
Now, with computers inside everything from phones to ATMs to cars, we
are overloaded just keeping all these conveniences working. If the power
goes off in the house for just one minute, it will take several minutes
just to reset all the clocks and appliances. The chip card has the potential
of forcing machines to reconfigure themselves to our interests and needs,
hold all of our information in digital format, and enable us to regain
control over our private information.
When the chip card is viewed from the consumer's perspective, logos
and advertisements become less important. Individuals may decide to
update their cards because they want a new image on the card, want to
personalize the design or want to help a charitable cause by carrying
their logoed card. Companies will entice the consumer to purchase their
cards based on consumer tastes and desires.
And while not everyone agrees with us, it's possible that these cards
will be purchased at convenience stores, electronics stores (like Radio
Shack) and even supermarket and drugstore chains. A user will go to
a kiosk or ATM, insert the old card to void it, use biometrics (such
as fingerprint scan) to prove identity, insert the new card, and re-activate
all the information. Our vision is based on an assumption that online
security will make great strides forward in the next few years.
What should a card manufacturer do now to prepare for this or some
other futuristic scenario? Probably nothing. The fact is, no one knows
how long it will be before the industry reaches this level of sophistication.
Our point is simply that futuristic scenarios represent another aspect
of modeling. History of the PC industry, however, does tell us that
the future arrived much faster than anyone in the late '70s or early
'80s predicted. In the meantime, chip card manufacturers should focus
on basic direction because like the PC, chip cards will go from proprietary
to an open architecture and from a company- to a customer-focused product.
Modeling, we believe, can give you a handle on emerging technologies
and help you develop a useful business case.
ABOUT THE AUTHOR: Dovell Bonnett has 13 years of diversified product
marketing, sales, communications, manufacturing and design engineering
experience, both on his own and within the context of some of the leading
technology and semiconductor companies. As the founder of K-Vell Electronics,
he offers his technology, project management, creative marketing and
cross-discipline business skills to companies wanting to enter not only
the smart card market, but many of the key semiconductor fields today.
For the past five years, he has focused on national and international
smart card sales and marketing. His knowledge encompasses the complete
smart card infrastructure of technologies, applications, standards and
legal issues. Dovell's experience includes mechanical, electrical and
systems design engineering; semiconductor marketing; and smart card
encryption. He holds a B.S. in Industrial Technology and a B.S. in Electrical
Engineering. Contact him at K-Vell Electronics, 2565 Lancaster Court,
Santa Clara, CA 95051; tel: 408-247-7932; fax: 408-261-3879; e-mail:
CTYANKEE@ix.netcom.com