Industry voice: Payments processors under pressure: customer success stories from the software industry

Page 1 of 2Introduction and analysis Scott Haug, Waterstone

The payments ecosystem continues to face significant change driven by the continued acceleration of traditional online commerce coupled with the increasing relevance of mobile technology—all of which is driving a new set of omnichannel consumer expectations. Big Data/Analytics, Internet of Things (IoT), Cloud, and "as a Service" business models are creating a myriad of new revenue generation and operating model improvement opportunities and changing the nature of competition and scale economics. In many ways, what is happening within the payments space mirrors what has already begun to change the traditional technology sector.

There has been a lot of focus on the consumer end of the payments value chain in terms of emerging solutions, mobile, digital wallets, and the changing nature of retail. However, these changes are also putting significant pressure on "behind the scenes" players in the merchant acquisition, processing, and services space, including:

Increased pricing pressure from traditional and new competitors and commoditization of core offerings - all driving an increased focus on customer retentionRise of ecommerce and mobile driving increasing merchant demand for integrated, omnichannel capabilitiesPressure on historical go-to-market and customer success models as well as limited ability for certain players to drive significant EBITDA via increased scale aloneIncreasing customer expectations for support and value-added services beyond just enabling payments

These challenges are compelling payment services providers, particularly merchant acquirers/processors, to transform many aspects of their business model to be successful. Three key value-creation themes have emerged as critical for success:

There has been substantial activity among leading players in the first two value-creation areas, particularly in new capabilities and offers, SMB segment focus, and go-to-market strategies and partnerships. In addition, we see the third value-creation area—optimizing customer experience and leveraging post-sales services and support—as an exceptional and underleveraged opportunity to enhance profitability and improve retention.

This is particularly true as some players can no longer drive profitability through scale economies alone. Our experience within the technology sector, particularly around software and other recurring revenue businesses, suggests that there are several lessons learned that are directly relevant to the payments processing ecosystem.

The payments ecosystem and key players in the value chain will continue to evolve towards software-enabled, integrated payments solutions and services. Further, we foresee growth in Cloud-enabled, potentially "as-a-Service" business models, either directly or through key partnerships.

In the transition to Cloud-enabled, Software-as-a-Service (SaaS) models, software companies have identified an increased need and opportunity to focus on improved customer experience. Doing so strengthens the role and contribution of services and support resources to grow revenues, reduce attrition, and enhance customer lifetime value. This is particularly relevant to players that have reached the point of maximum economies of scale and need to drive incremental EBITDA through differentiating products/services and enhancing customer support.

Page 1 of 2Introduction and analysis

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Driven by GTA Online's success, Take-Two sees future in Internet games

Ahead of the re-release of Grand Theft Auto V for newer consoles, the game maker's fiscal second-quarter earnings shed light on its growing online business.

Grand Theft Auto V, the fastest-selling video game of all time, is seeing a PlayStation 4 and Xbox One release on November 18. Take-Two

Could Take-Two Interactive Software have found its equivalent of World of Warcraft?

Grand Theft Auto, the video game maker's most popular franchise, may be morphing into more than just a short-term cash cow by generating sales over longer periods of time. This is happening through an online world called GTA Online, which allows players to interact with one another and build homes, steal cars and pull off heists.

GTA Online's success gives Take-Two a product similar to Activision's World of Warcraft, itself one of the most successful online video games ever made. That game, which is set in a medieval fantasy world, attracted as many as 12 million gamers at its peak in 2010. Competitors have tried to replicate its success with mixed results, but Take-Two may have found its answer. That's part of what the company discussed during its better than expected fiscal second-quarter earnings, released Wednesday.

GTA Online was released alongside the fifth installment in the company's Grand Theft Auto crime drama series, which itself broke video game sales records when it was released last September. The game rung up more than $1 billion in sales in its first three days on the market. Now, GTA Online has become one of the company's most popular products.

Take-Two has said it plans to continue investing in GTA Online, offering new features when the company launches a remastered version of Grand Theft Auto made for PCs, as well as Microsoft's Xbox One and Sony's PlayStation 4 video game consoles.

"We expect this is something that will continue to grow," said Strauss Zelnick, Take-Two's CEO, in an interview. "We remain optimistic that GTA Online for next-gen will also delight consumers."

The move is part of Take-Two's broader efforts to sell games not just for PCs and consoles, but mobile devices as well -- and to do so over the Internet. Take-Two was one of the first video game companies to offer extended story lines for its games about a decade ago. The company has since expanded to selling full games over the Internet as well, an effort that swept the industry and became even more widespread after Apple's App Store became a popular way to sell apps for mobile devices.

Now, Take-Two said sales over the Internet reached $90 million in the second quarter, down slightly from the same time a year ago when Grand Theft Auto V was released.

Overall, Take-Two said sales in the quarter ending September 30 were $135.4 million, down from $1.27 billion in the year-ago period due to last fall's GTA V release, after adjustments for deferred revenue and other items. The company's adjusted loss came in at 44 cents a share, down from a profit of $2.49 a share a year ago when it released GTA V. Analysts had expected the company to report on average a loss of 59 cents on revenue of $110.9 million, according to surveys by Thomson Reuters.

Take-Two has long been known only for publishing and funding development for Rockstar Games' Grand Theft Auto, a series that boosts sales and profit with a new installment only every few years. Yet Take-Two has been changing its formula to stay competitive as other large publishers like Electronic Arts and Activision Blizzard have moved resources toward sales through online marketplaces.

EA develops annual game titles for its FIFA soccer and Madden football franchises and has seen considerable growth in sales from the Ultimate Team fantasy sports services. Activision has spun off numerous titles from the Warcraft brand, including the free-to-play Hearthstone: Heroes of Warcraft tablet title. Take-Two is hoping its new titles can deliver similar long-term success that keeps players spending money online.

Investors responded favorably on Wednesday, sending Take Two's stock up more than 6 percent in after-hours trading. The company's shares have risen more than 31 percent so far this year.

For the third fiscal quarter ending December 30, Take-Two anticipates profit between $1.35 to $1.45 a share on sales between $735 to 760 million, after adjustments. Analysts on average estimate fiscal third-quarter earnings of $1.21 a share on sales of $778.6 million, according to surveys by Thomson Reuters.

Take-Two has raised its fiscal year sales guidance by $150 million to between $1.4 and $1.5 billion and increased its annual earnings forecast per share by 25 cents to between $1.05 and $1.30.

Ian Sherr Ian Sherr is a senior writer for CNET focused on social media and video game companies. He has previously written for The Wall Street Journal, Reuters and the Agence France-Presse. He's a native of the San Francisco Bay Area, though he knows what real weather feels like too. See full bio

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Opinion: Why Microsoft must ensure Windows 9 is a big success

According to Gartner, 2013 was the worst year in the history of the PC business as sales plummeted by 35 million units year-on-year.

Rather than giving PCs a shot in the arm, Windows 8 appeared to have put them to sleep: in February 2014, Netmarketshare reported that Windows 7 had 48% of the PC market compared to just 11% for Windows 8. Windows XP, a 12-year-old OS, had 29%.

The good news is that things are looking better this year and PC sales are on the rise. The bad news is that that the reason doesn't appear to be Windows 8.1.

According to August's figures from Net Applications, Windows 8.x is suffering from declining market share – a small decline, but a decline nevertheless.

Sales haven't rallied because businesses have learned to love Windows 8. They've rallied because Microsoft finally pulled the plug on Windows XP. Microsoft needs to persuade businesses not to stick with Windows 7.

That's a terrible indictment of Windows 8, and it puts enormous pressure on Windows 9. To have your most important customers shun one major OS is unfortunate. To have them shun two would be disastrous.

Writing on Windows IT Pro, veteran Windows watcher Paul Thurrott argues that Windows 8 was more of a disaster than Windows Vista. "With Vista, the solution was easy: Just make it faster, lighter, and smaller, and slap a new name on it – Windows 7 – and watch the accolades roll in," he says. "But Windows 8? Oh boy."

Windows 8.1 did improve things, but it couldn't solve the fundamental problem with Windows 8: it's two completely different operating systems bolted together, and it's particularly confusing on the non-touch PCs that most Windows users have.

That's been great news for Microsoft's rivals. We've seen Chromebooks make big progress in education and iPads in enterprises. Apple continues to hoover up the biggest profits in the PC industry, and iOS and Android dominate the mobile device market.

Windows 8 has been a disaster, and come October it'll be the only disaster in town. That's when Microsoft is killing off Windows 7 on new PCs, a year after ending sales of the software. Unless you go for the pricey Windows 7 Pro, come November if you want a PC it'll come with Windows 8.

That's where Windows 9, also known as Threshold, comes in. Its job isn't just to repair the damage Windows 8 wrought – it also needs to persuade Microsoft's largest market, its most important customers, to upgrade to its latest OS rather than stick with a version it's already trying to take off the market. If Windows 9 can't do that, then Windows' future looks awfully like its very recent past.

We're expecting to see Windows 9 at the end of this month, but it won't be available to everybody: according to reports, the "Enterprise Technical Preview" of Windows 9 will be unveiled on the 30th of September but previews for consumer users, including phone and tablet users, won't arrive until 2015.

From the images and details that have leaked so far it's clear that Microsoft has taken some of the Windows 8 criticism on board.

The Start menu has been changed to combine traditional menu items and tiled icons; Modern-style apps can be run in windowed mode in the desktop environment as well as full screen; the much-hated Charms appear to have been binned; there are virtual desktops; and there is a new notification centre.

Speculation also suggests that Windows Phone's virtual assistant Cortana will make the move to the desktop, and leaked images showing Windows Phone devices without the Phone bit underline Microsoft's plan to make a single unified operating system across multiple platforms. That would mean the end of Windows RT and Windows Phone.

Windows 9, aka Threshold, isn't the only Windows on the horizon. Windows 8.1 with Bing, a low-cost version of Windows for small tablets and laptops where OEMs set the default search as Bing (users can still change the default if they wish), is spearheading a wave of low-cost Windows devices such as Toshiba's £103 Encore Mini.

That puts Windows head-to-head with small Android tablets, Apple's all-conquering iPads and Google's increasingly compelling Chromebooks.

One of the most compelling Windows 9 rumours is that Microsoft will do what it did with Windows 8.1: make it available for free.

According to analyst firm Net Applications, the Windows 8.1 update has gained significant market share very quickly: 53% of PCs running Windows 8.x are running the most recent version just seven months after it was introduced. Windows 8's uptake was significantly slower.

Writing in Computerworld, Gregg Keizer suggests that Microsoft may be considering making Windows 9 a free upgrade not just to Windows 8.1, but to Windows 7 too.

If he's right, the effects could be significant: just imagine all the low-cost devices sold with Windows 8.1 with Bing and the corporate computers sticking with Windows 7 all upgrading to Windows 9.

It wouldn't be overnight, but Windows 9 would accumulate significant market share much more quickly than if it were a paid-for product.

That makes Microsoft's job easier, with the bulk of its customers on the most secure version of Windows to date, using its most recent web browser, able to access its Windows Store and using Microsoft's various online services.

That market share would be in the consumer sector at first, because of course businesses are more careful and tend to upgrade much more slowly, but the corporations would eventually get on board too.

In that scenario the money Microsoft would lose on OS sales would be more than compensated by the money it would make from selling services. Perhaps the Threshold codename is prescient: Microsoft could be on the threshold of something very interesting indeed.

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