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14/11/2019by EOS Intelligence EOS Intelligence No Comments

Blockchain Likely to Make a Safe Landing in Aviation Sector

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Blockchain technology has captured the interest of several industries and aviation is no exception. Its decentralized, secure, and immutable nature makes blockchain technology ideal for many operational aspects and verticals within the aviation industry. In fact, most of the blockchain-based solutions in the aviation sector extend beyond basic financial transactions and range across security and identity management, ticketing, maintenance, baggage management, and loyalty programs. Various stakeholders in the aviation industry, including airlines, airports, aircraft manufacturers and maintenance providers, and airspace technology providers, etc., are partnering together to explore and develop blockchain-based capabilities across the industry’s value chain.

Blockchain technology is fast emerging as the revolutionary technology in the aviation industry with most airline and airport CIOs investing huge resources and effort in exploring this space. As per Air Transport IT Insights 2018 report by SITA, one of the world’s leading air transport communications and information technology company, about 60% airlines have invested in blockchain-based pilot projects or research programs for implementation by 2021. This shows an increase from 2017, when only 42% airlines invested in blockchain-based research programs. Moreover, airports are also exploring this technology, with 34% airports planning blockchain-based R&D projects by 2021.

Owing to its decentralized, scalable, transparent, and secure nature, blockchain technology’s capabilities align well with the needs of the aviation sector, especially in the fields of ticketing, maintenance, luggage tracking, loyalty programs, and identity management.

Blockchain to streamline security and identity management

Passenger identity management is one of the most sought-after uses of blockchain in aviation. As per the SITA study, about 40% airlines and 36% airports claim passenger identity management to be one of the most prominent areas of application and benefit of blockchain technology.

Blockchain technology has the ability to streamline the identity management of passengers through the combined use of blockchain, biometrics, and mobile (or wearable devices). Currently, a passenger needs to pass several checkpoints where different parties (airport staff, airlines, control authorities, etc.) verify their physical IDs. This process is cumbersome, time consuming, and also vulnerable to human errors. Moreover, it results in a great amount of duplication of data as each stakeholder stores and verifies passenger information at their own level.

Blockchain, owing to its immutable, decentralized, and secure nature, helps solve these issues by validating identities using biometrics. Blockchain with security wrappers ensures that the information stored in the system is protected and helps share it with all the stakeholders through the use of authorized access protocols. Thus, blockchain and biometric-based ID management help eliminate the need for paper documentation (such as passport and visa) across the entire journey. This will facilitate a smoother and quicker travel experience for the passenger, as compared with the current verification and multiple checkpoints. Moreover, it will reduce security lapses as the need for paper documents (that can be forged) and human intervention is low.

Blockchain start-up Sho Card, which provides digital identification cards through blockchain, has partnered with SITA to develop a digital identity card as a proof of concept, wherein the traveler obtains a single travel token for his journey.

Under this concept, the traveler undergoes an initial check at the travel counter, where he is positively identified using biometrics and issued a travel token. A photo of the traveler is also taken for verification. This information (biometric ID information, travel token, photo) is stored on the travelers mobile or wearable device and replaces the requirement of any physical/paper identification. When the traveler approaches any gate or checkpoint, he presents the travel token via a QR code on the SITA traveler app. The agent at the checkpoint scans the QR code and validates the travel token and the individual matches to that in the photo. The traveler is allowed to pass if the information matches. This significantly reduces costs and time taken at several checkpoints for document validation. Moreover it reduces the human liability around documents check.

Other blockchain players, such as UK-based ObjectTech and VChain Technology, have also entered into agreements with Dubai’s Immigration and Visa Department and International Airlines Group (AIG), respectively, to provide blockchain-based solutions to streamline passenger data management for the aviation sector.

Blockchain and biometric-based ID management help eliminate the need for paper documentation (such as passport and visa) across the entire journey. This will facilitate a smoother and quicker travel experience for the passenger, as compared with the current verification and multiple checkpoints.

Smart contracts to ease out ticketing

Airlines currently sell paper-based or electronic tickets through their centralized ticketing system. For each booking, there are multiple touchpoints, which include airlines, travel agencies (online and offline), banks and card providers, and government agencies. Upon the sale of a ticket, each party stores passenger data at their individual level, which makes the process complex and vulnerable to errors. In addition, ticketing information being currently stored in a centralized database by airlines and airports makes it vulnerable to hacks and glitches, which in turn can result in reputation and revenue loss for the airlines or airport. This was seen in case of Southwest Airlines in July 2016, when the centralized ticketing database failed, resulting in the cancellation of about 2,000 flights and a revenue loss of US$82 million.

The use of blockchain-based smart contracts helps eliminate the need for paper tickets and e-tickets can be tokenized. Tokenized tickets can have their own set of embedded business logic and terms and conditions associated with how they are sold and used including pricing and timings for the flights. Moreover, further stipulations can be added to the ticket such as the class of the ticket, lounge access, etc. The decentralized nature of blockchain insulates it from hacking and system failures and also mitigates data sharing errors. Furthermore, it allows for the sale of tickets in real-time from different partners across the globe. It also improves customer experience and cost effectiveness of service by automating time consuming tasks, streamlining payment process, and reducing settlement times.

The use of blockchain-based smart contracts helps eliminate the need for paper tickets and e-tickets can be tokenized. Tokenized tickets can have their own set of business logic and terms and conditions associated with how they are sold and used including pricing and timings for the flights.

In July 2018, Russia’s second largest airline, S7 Airlines partnered with Russian commercial Bank, Alfa Bank, to build and sell its airline tickets over an ethereum-based private blockchain platform. The use of blockchain enabled the airlines to securely connect its online booking system with the bank’s payment processing systems, thereby speeding the payment processing time (from about two weeks to less than a minute) and reducing manual paperwork. In July 2019, the airline’s blockchain-based ticketing platform witnessed sales of US$1 million, indicating the success of the venture.

Blockchain to enable luggage tracking

One of the areas where airlines are constantly working on improving customer service and reducing costs is cargo and passenger baggage management. A passenger’s baggage passes through several automated and manual processes before being handed back to them and data about the cargo/luggage’s journey is usually stored in a non-standardized form on an individual level by multiple players that handle the cargo/luggage, including airlines personnel, transportation companies, airports, and local authorities.

This process results in passenger luggage being often lost or misdirected, a fact that impacts the airlines both in terms of reputation and cost. As per SITA’s Baggage Report 2018, this translated into additional costs of about US$2.3 billion for airlines in 2017.

Blockchain, which functions as an online record-keeping system maintained on a peer-to-peer network rather than a central agency or authority, can help airlines tackle the issues of lost luggage. Using blockchain, customers (and airlines) can track the luggage throughout its transfer process, which provides full transparency to the process. Thus if a bag is misplaced, the airlines can track back the entire journey of the lost luggage to identify the point where it went missing and why.

In November 2017, Air New Zealand partnered with Swiss-based start-up Winding Tree (which is a blockchain-based distribution platform for the travel industry), to explore applications based on blockchain technology that could help the carrier improve the efficiency and security of booking and baggage tracking services. The potential applications that Air New Zealand is looking to explore include cargo and baggage tracking, retail distribution, and loyalty program opportunities.

Another use of blockchain in baggage management is in determining lost baggage compensation. Through the use of smart contracts, airlines could automate insurance claims for lost baggage and instantaneously compensate customers. Rega, a blockchain insurance platform, has been deploying blockchain to create a “crowd-insurance” platform in which the risk of lost luggage is shared across the community. This works primarily as a peer-to-peer insurance that uses smart contracts and smart tokens to insure baggage for a group of passengers without the need for any insurance companies, agents, or intermediaries. Through this method, it has managed to reduce lost baggage premium to about US$12 annually for a coverage of up to US$5,000.

Blockchain to better manage maintenance history and spare parts sourcing

Flight maintenance is one of the largest cost-heads for an airline. As per IATA, in 2017, airlines globally spent US$76 billion on MRO (maintenance, repair, and overhaul), representing about 11% of total operational costs.

Currently, the MRO process is extremely complex, with the value chain encompassing multiple players such as manufacturers, component traders, airlines, service providers, and regulatory authorities. Moreover, each of these bodies store information in separate databases or physical ledgers. This makes obtaining information about components and maintenance extremely challenging and time consuming. Moreover, it can lead to data discrepancy (as it is stored at individual levels by the various parties), which in turn questions the reliability of this data and the safety of the component. In these cases, the worthiness of the component is established through an expensive and time consuming investigation, testing, and recertification process.

Blockchain’s decentralized, immutable, and transparent nature, makes it ideal for managing MRO records for airlines. Blockchain digitally logs and stores data regarding aircraft spare parts and maintenance, from the time the part is manufactured, to when it is installed, to every time maintenance or repair occurs. This decentralized, transparent, and real-time storage of data ensures that the information is available to all authorized parties (from airlines to MRO service providers) in a prompt and accurate manner, thereby saving on time and costs while achieving better safety and maintenance standards.

Blockchain’s decentralized, immutable, and transparent nature, makes it ideal for managing MRO records for airlines.

In addition, the use of blockchain enables airlines to engage in more predictive maintenance, by enabling technicians to review the complete configuration and history of the various components in the aircraft on a blockchain-based ledger. This helps them tackle issues in a preventive manner rather than taking action after a problem has occurred. Similarly, MRO providers can also use blockchain to offer predictive maintenance services to airlines, saving money for both themselves and the airlines.

Blockchain also helps in sourcing spare parts and removing middle men in the sourcing process. Currently, aircraft components are sourced from vendors or traders in a marketplace, who then further scout for the component with manufacturers or sometimes other traders/resellers. This process is expensive (due to multiple mark-ups) and time consuming and most of all, lacks transparency. To tackle this, various manufacturers, airlines, and MROs can create a blockchain-powered aerospace marketplace, where the buyers can share the serial number of the product needed, which in turn can be matched to the real-time ownership and location of the seller currently holding the product. This would eliminate the need for middle men in the industry and also save time and reduce costs especially in case of scarce parts.

In October 2017, Air France-KLM announced its plans to evaluate and develop a blockchain-based system to manage replacement parts on in-service airplanes and improve aircraft maintenance procedures and record keeping. Similarly, in August 2018, Russian airlines, S7, in association with Russian energy player, Gazprom Neft, announced the successful development and implementation of a blockchain-based system to refuel aircraft using smart contracts. The smart contracts will remove the need for pre-payment, bank guarantees, and will further insulate the parties from any unforeseen financial risks involved in the refueling process. This is expected to help reduce cost and also save time both for the airlines as well as their energy partner.

Blockchain to add value to airlines loyalty programs

Flyer loyalty programs, better known as frequent flyer miles, are an integral part of an airline’s customer engagement program. All airlines run a loyalty program, whether individually or as an alliance. However, in traditional loyalty programs travelers need to wait to accrue a certain amount of points to utilize them, with limitations on where and when they can use them. Loyalty programs for alliances have an even more complex structure when compared with stand-alone loyalty programs. This results in limited incentive for travelers to remain loyal to a certain airline(s), thereby defeating the purpose of frequent flyer programs.

Blockchain has the ability to streamline the frequent flyer programs, especially for alliances. By tokenizing loyalty points on the blockchain, travelers can obtain instant value for the points by redeeming them in real-time and across a great number of partnering merchants. Thus with points being accepted as a form of “currency” across a pool of merchants, travelers can use these points in a faster and more efficient manner, thereby remaining motivated to maintain loyalty with a particular airline(s).

In July 2018, Singapore Airlines was the first airline globally to launch a blockchain-based loyalty program for frequent flyers. Under this program, Singapore Airline members can convert their miles into units of payments which are stored in a digital wallet, called KrisPay. This digital wallet was developed by Singapore Airlines in partnership with KPMG and Microsoft. The airline has partnered with 18 merchants across Singapore (including eateries, gas stations, beauty parlors, etc.) where customers can use KrisPay units.

Blockchain initiatives

Considering the various applications of blockchain across the aviation sector, a great number of airlines and airspace technology providers are investing heavily to explore this space and develop blockchain-based solutions for various verticals.

In July 2018, Lufthansa airlines partnered with SAP to launch a global Aviation Blockchain Challenge in order to support blockchain R&D in the sector. Through this venture, the two companies are seeking ideas from entrepreneurs and blockchain start-ups with regards to enhancing passenger experience, improving airline operations, processes, and maintenance, and streamlining the aviation supply chain.

Similarly in July 2018, SITA, which is the air transport industry’s largest technology provider and is jointly owned by a large number of airlines, launched the Aviation Blockchain Sandbox project. Through the Sandbox project, the technology provider aims to achieve intra-industry collaboration to understand and explore the applications of blockchain in the aviation space and undertake cross-industry initiatives. This platform gives access to smart contracts known as FlightChain, which will help improve flight status data problem for airlines and airports by storing all flight information on the blockchain to provide consistent data across the network.

EOS Perspective

Blockchain technology has taken several industries by storm, and shows great potential in several others (read our previous publications: Blockchain Technology – Next Frontier in Healthcare?, Blockchain Paving Its Way into Retail Industry, and Blockchain: A Potential Disruptor in Car Rental and Leasing Industry to find out more). Aviation seems to be no exception. Although application of blockchain in the aviation industry still seems to be largely at the exploration stage (with most companies running proof of concepts and investing in testing phases), it definitely holds the potential to transform the way air travel is currently done.

***Explore our other Perspectives on* *blockchain***

That being said, blockchain cannot be seen as a universal remedy for all the issues faced by the aviation sector. To ensure that blockchain is used in the most efficient and cost effective manner, it is critical for players to have a solution-oriented approach when exploring blockchain-based applications, i.e. starting with a specific problem and working towards developing solutions, rather than making blockchain a solution and looking for problems to solve with it. With blockchain becoming the buzz word across the board, it is very common for companies to get carried away with the technology trying to fit in places, where its needs or costs are not justified. Considering that the technology is relatively new and has limited scalability at the moment, a lot of blockchain-solutions that may work well in theory may not be practical in today’s day and may need to wait for the blockchain technology to evolve further.

Moreover, for blockchain to be successfully applied across the industry, it is very important for the stakeholders to collaborate to develop blockchain solutions with regards to sharing data, technology, and costs related to R&D. This is also somewhat of a challenge as adoption of blockchain requires transparency and most companies are wary of sharing their data and information with external players.

Despite these challenges, the adoption of blockchain technology by the aviation sector seems more like a matter of “when”, rather than “if”. Most players in the aviation sector have been operating through traditional business practices for several decades now and may take time to embrace blockchain in mainstream operations. However, several players such as Lufthansa and Air France-KLM have started leading the way. With promises of cost savings and better services, it is to be seen if blockchain can enjoy a smooth landing in the aviation sector.

03/04/2019by EOS Intelligence EOS Intelligence No Comments

Connecting Africa – Global Tech Players Gaining Foothold in the Market

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While in the past, most global tech companies have focused their attention on emerging Asian markets, such as India, Indonesia, Vietnam, etc., they have now understood the potential also offered by African markets. Africa currently stands at the brink of technical renaissance, with tech giants from the USA and China competing to establish here a strong foothold. That being said, Africa’s technological landscape is extremely complex owing to major connectivity and logistical issues, along with a limited Internet user base. Companies that wish to enter the African markets by replicating their entry and operating models from other regions cannot be assured of success. In addition to global tech firms building their ground in Africa, a host of African start-ups are increasingly finding funding from local as well as global VC and tech players.

Great potential challenged by insufficient connectivity

Boasting of a population exceeding 1.2 billion (spread across 50 countries) and being home to six of the world’s ten fastest-growing economies, Africa is increasingly seen as the final frontier by large global technology firms.

However, the African landscape presents its own set of challenges, which makes increasing tech penetration extremely complex in the market. To begin with, only about 35% of the continent’s population has access to the Internet, as compared with the global rate of 54%. Thus, Africa’s future in the technology space greatly depends on its ability to improve digital connectivity. This also stands in the way of large tech-based players that wish to gain foothold in the market.

Large players try to lay the necessary foundations

Due to this fundamental challenge, companies such as Google, Facebook, and IBM have initiated long-pronged strategies focusing on connectivity and building infrastructure across Africa. Facebook’s Free Basics program (which provides access to a few websites, including Facebook and Whatsapp, without the need to pay for mobile data) has been greatly focused on Africa, and is available in 27 African countries. With Facebook’s partnership with Airtel Africa, the company has started to strengthen its position in the continent.

Similarly, Google has launched Project Link, under which it rolled out a metro fiber network in Kampala, Uganda, with Ghana being in the pipeline. Through such efforts and investments, Google is aimed at bringing about faster and more reliable internet to the Africans.

Microsoft, which has been one of the first players to enter the African turf, is also undertaking projects to improve connectivity in Africa. The company has invested in white spaces technology, which uses unused radio spectrum to provide Wi-Fi connectivity at comparatively lower costs.

However, managing to get people online is only the first step in the long journey to develop a growing market. Companies need to understand the specific dynamics of the local markets and develop new business models that will fit well in the African market.

For instance, globally, the revenue model for several leading tech companies, such as Google and Facebook, largely depend on online advertising. However, the same model may not thrive in most African markets due to a limited digital footprint of the consumers as well as the fact that the business community in the continent continues to draw most transactions offline, using cash.

Players employ a range of strategies to penetrate the market

These tech giants must work closely with local businesses and achieve an in-depth understanding of the unique challenges and opportunities that the African continent presents. Therefore, these companies are increasingly focusing on looking for collaborations that will help in the development of successful and sustainable businesses in the continent.

Leading players, such as Google and Microsoft have been investing heavily in training local enterprises in digital skills to encourage businesses to go online, so that they will become potential customers for them in the future.

While this strategy has been used somewhat extensively by US-based and European companies, a few Chinese players have recently joined the bandwagon. For instance, Alibaba’s founder, Jack Ma announced a US$10 million African Young Entrepreneurs Fund on his first visit to Africa in July 2017. The scheme will help 200 budding entrepreneurs learn and develop their tech business with support from Alibaba.

The company has also been focusing on partnerships and collaborations to strengthen its position in the African market. Understanding the logistical challenges in the African continent, Alibaba has signed a wide-ranging agreement with French conglomerate, Bollore Group, which covers cloud services, digital transformation, clean energy, mobility, and logistics. The logistics part of the agreement will help Alibaba leverage on Bollore’s strong logistics network in Africa’s French-speaking nations.

Considering the importance of mobile wallets and m-payments in Africa, Alibaba has expanded its payment system, Alipay, to South Africa (through a partnership with Zapper, a South Africa-based mobile payment system) as well as Kenya (through a partnership with Equitel, a Kenya-based mobile virtual network operator). In many ways, it is applying its lessons learnt in the Chinese market with regards to payments and logistics, to better serve the African continent.

While Chinese players (such as Alibaba and Baidu) have been comparatively late in entering the African turf, they are expected to pose a tough competition to their Western counterparts as they have the advantage of coming from an emerging market themselves, with a somewhat better understanding of the challenges and complexities of a digitally backward market.

For instance, messaging app WeChat brought in by Tencent, China-based telecom player, has provided stiff competition to Whatsapp, which is owned by Facebook and is a leading player in this space. WeChat has used its experience in the Chinese market (where mobile banking is also popular just as it is across Africa) and has collaborated with Standard Chartered Bank to launch WeChat wallet. In addition, WeChat has collaborated with South Africa’s largest media company, Naspers, which has provided several value added services to its consumers (such as voting services to viewers of reality shows, which are very popular in Africa). Thus, by aligning the app to the needs and preferences of the African consumers, it has made the app into something more than just a messaging service.

While collaboration has been the go-to strategy for a majority of tech companies, a few players have preferred to enter the market by themselves. Uber, a leading peer-to-peer ridesharing company entered Africa without collaborations and is currently present in 16 countries.

While entering without forging partnerships with local entities helps a company maintain full control over its operations in the market, in some cases it may result in slower adoption of its services by the local population (as they may not be completely aligned with their preferences and needs). This can be seen in the case of Netflix, a leading player in the video streaming service, which extended its services to all 54 countries in Africa in January 2016 (the company has, however, largely focused on South Africa). Despite being a global leader, Netflix has witnessed conservative growth in the continent and expects only 500,000 subscribers across the continent by 2020.

On the other hand, Africa’s local players ShowMax and iROKO TV have gained more traction, due to better pricing, being more mobile friendly (downloading option) and having more relatable and local content, which made their offer more attractive to local populations.

Netflix, slowly understanding the complexities of the market, has now started developing local content for the South African market and working on offering Netflix in local currency. The company has also decided to collaborate with a few local and Middle-Eastern players to find a stronger foothold in the market. In November 2018, the company signed a partnership with Telkom, a South African telecommunication company, wherein Netflix will be available on Telkom’s LIT TV Box. Similarly, it partnered with Dubai-based pay-TV player, OSN, wherein OSN subscribers in North Africa and Middle East will gain access to Netflix’s content available across the region. However, while Netflix may manage to develop a broader subscriber base in South Africa and a few other more developed countries, there is a long road ahead for the company to capture the African continent as a whole, especially since its focus has been on TV-based partnerships rather than mobile (which is a more popular medium for the Internet in Africa).

On the other hand, Chinese pay-TV player, StarTimes has had a decade-long run in Africa and has more than 20 million subscribers across 30 African countries. While operating by itself, the company has strongly focused on local content and sports. It also deploys a significant marketing budget in the African market. For instance, it signed a 10-year broadcast and sponsorship deal with Uganda’s Football Association for US$7 million. To further its reach, the company also announced a project to provide 10,000 African villages with access to television.

US-based e-commerce leader, Amazon, is following a different strategy to penetrate the African markets. Following an inorganic approach, in 2017, Amazon acquired a Dubai-based e-retailer, Souq.com, which has presence in North Africa. However, the e-commerce giant is moving very slowly on the African front and is expected to invest heavily in building subsidiaries for providing logistics and warehousing as it has done in other markets, such as India. This approach to enter and operate in the African market is not widely popular, as it will require huge investment and a long gestation period.

Local tech start-ups are on the rise

While leading tech giants across the globe are spearheading the technology boom in Africa, developments are also fueled by local start-ups. As per the Disrupt Africa Tech Startups Funding Report 2017, 159 African tech start-ups received investments of about US$195 million in 2017, marking a more than 50% increase when compared to the investments received in 2016.

While South Africa, Nigeria, and Kenya remained the top three investment destinations, there is an increasing investor interest in less developed markets, such as Ghana, Egypt, and Uganda. Start-ups in the fintech space received maximum interest and investments. Moreover, international VC such as Amadeus and EchoVC as well as local African funds appear keen to invest in African start-ups. The African governments are also supporting start-up players in the tech space – a prime example being the Egyptian government launching its own fund dedicated to this objective.

African fintech start-ups, Branch and Cellulant, have been two of the most successful players in the field, raising US$70 million and US$47.5 million, respectively, in 2018. While Branch is an online micro-lending start-up, Cellulant is a digital payments solution provider. Both companies have significant presence across Africa.

EOS Perspective

Although US-based players were largely the first to enter and develop Africa’s technology market, Chinese players have also increasingly taken a deeper interest in the continent and have the advantage of coming from an emerging market themselves, therefore putting themselves in a better position to understand the challenges faced by tech players in the continent.

Most leading tech players are looking to build their presence in the African markets. Their success depends on how well they can mold their business models to tackle the local market complexities in addition to aligning their product/service offerings with the diverse needs of the local population. While partnering with a local player may enable companies to gain a better understanding of the market potential and limitations, it is equally imperative to identify and partner with the right player, who is in line with the company’s vision and has the required expertise in the field – a task challenging at times in the African markets.

While global tech companies are stirring up the African markets with the technologies and solutions they bring along, a lot is also happening in the local African tech-based start-ups scene, which is receiving an increasing amount of investment from VCs across the world. In the future, these start-ups may become potential acquisition targets for large global players or pose stiff competition to them, either across the continent or in smaller, regional markets.

It is clear that the technological wave has hit Africa, changing the continent’s face. Most African countries, being emerging economies in their formative period, offer a great potential of embracing the new technologies without the struggle of resisting to adopt the new solutions or the problem of fit with legacy systems. It is too early to announce Africa the upcoming leader in emerging technologies, considering the groundwork and investments the continent requires for that to happen, however, Africa has emerged as the next frontier for tech companies, which are causing a digital revolution in the continent as we speak.

15/03/2018by EOS Intelligence EOS Intelligence No Comments

Fitness Apps Thrive in Spite of Issues, But for How Long?

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Global fitness app market was worth US$930 million in 2016, expected to grow at a CAGR of 23.6% during 2016-2021 to reach US$2.7 billion. This growth can be attributed to drivers such as steady increase in smartphone adoption, affordable costs of mobile apps, as well as growing health awareness among consumers, including smartphone users. Regardless of how steady growth the market is registering, its expansion may hit a roadblock due to low product differentiation in a fiercely competitive market and unclear privacy policies that may cause wariness among consumers.

Fitness apps are becoming a new way to stay fit for smartphone and tablet users. During 2014-2016, fitness apps users have greatly increased in number, which led to fitness apps usage increase of over 330% in that period. A major driver of this growth is the fact that many fitness apps are highly engaging, according to a 2016 research conducted by Apptentive, a mobile customer experience and engagement software measuring the percentage of customers who retained an app for a certain period of time. In the health and fitness category, an average of 75% of users retained an app for at least 28 days, positioning the category as one of the top performers among news, finance, music, and shopping apps.

The high engagement of fitness apps is partially due to these apps providing users with a constantly-updated overview of their performance details and general wellness, which offers continuous motivation. This certainly benefits fitness apps growth and expansion in the market by not only attracting new users but also keeping existing users as loyal customers (at least to a certain extent).

Another driver for the fitness apps market growth is the cost-effectiveness of these apps, especially in comparison with typical gym membership fees. While a local gym in a city such as New York may charge around US$130 a month (plus a sign-up fee in some cases), fitness apps offer basic training routines, tracking location, and a calorie counter free of charge. Most fitness and health apps also offer an upgraded version with extra features, such as personal trainer, at prices ranging between US$2.99 a month and US$49.99 for an annual subscription.

These drivers bring about a favorable market environment for fitness apps to thrive, further underpinned by an estimated 2.1 billion smartphone users globally in 2016, a strong internet penetration – 87.4% in the USA, 73.1% in Europe, 54.3% in Latin America, and 52.3% in Asia, and a growing health awareness among an increasing number of people.

What may seem as a challenge is the fact that many fitness apps do not manage to stand out in the vast pool of apps, resulting in lack of product differentiation in the market. Most fitness apps offer very similar features – workout routines adjusted to the user’s level of fitness, sharing workout results online, etc., with focus on increasing user’s engagement with the app. Although this last point seems to have been achieved as fitness app users seem to be generally loyal to one app, a low product differentiation means low switching barriers for the users over long term, while limited innovation in introduction of new features can potentially hinder fitness app market growth.

Another challenge for fitness app developers is to improve the apps’ privacy policies. Fitness apps collect a gamut of sensitive, personal information about the users and require the geo-location feature to be enabled during workouts, meaning user’s location can be pinpointed at any time while using the app. Fitness apps mostly fail to clearly specify how this information will be handled. According to a report published by the Future of Privacy Forum (FPF), USA-based think tank and advocacy group, 30% out of the top paid and free health and fitness apps found in the App Store and Google Play in 2016 lagged behind in providing basic transparency about the app’s privacy terms. In other words, there is a probability that personal user information logged on the apps could be misused, weakening consumer’s trust, which could translate into users choosing not to use fitness apps to exercise, as their awareness of privacy issues increases.

Such lack of transparency from fitness app providers may cause users to grow wary of using the apps to track their workouts and to introduce personal information regarding their health. This can turn out to be a considerable problem for the app companies, as the key advantage and the selling point of their products is personalized data analysis, training plans, performance charts, etc., for which it is essential that the user allows the app to gather their personal health and workout input data. Without this, the use of these apps is virtually pointless.

EOS Perspective

Fitness apps have proven to be highly engaging causing consumers to rapidly adopt the ’anytime, anywhere’ way of exercising and to continue using these apps through extended periods of time. While convincing potential users to start using any fitness app does not seem to be a problem and customer acquisition does not pose a major challenge in general for the industry as a whole, it appears that low product differentiation is the key obstacle for individual developers to get their products to stand out in the jumble of similar apps, and this lack of differentiation might be the factor to hamper fitness app market growth.

Some app providers seem to be noticing this, however they are trying to tackle this issue by doing everything but truly differentiating their products, and instead attempt to outdo their competitors by trying to shout loud about their own apps. As many apps lack differentiation and tend to melt into one vast pool of similar apps, fitness app developers are trying to make their products be more heard and visible using social medial to gain a competitive advantage.

One such case is the Sweat app, belonging to the Australian international fitness figure Kayla Itsines, who has been using social media extensively – mainly Instagram and Facebook – as a means of promotion for her app. By implementing a well-designed and aggressive social media marketing strategy, the Sweat app spread around 195 countries engaging 11 million users in 2017 alone. In that same year, the app registered US$100 million in revenue. The use of social media (hashtags, motivational photos, short videos, reposting before and after pictures of app users who had made remarkable progress) granted major visibility in the market and an increase in new subscriptions, without the need for actual innovation and truly unique selling proposition.

A lot of fitness apps offer user workouts based on generic information introduced by the user (e.g. weight, height, age) and data measured by GPS, accelerometer, or gyroscope, however lack the ability to register the body’s real-time performance, which has an impact on the accuracy of the gathered data and recommendations. This gap offers a good opportunity to differentiate and the app developers should try to align their applications with current trends such as the increasing popularity of wearable devices and smart garment.

Fitness apps companies might want to continue to seek to collaborate with garment industry players to develop smart garment – a piece of clothing such as a sport bra with conductive threads woven into the fabrics to work wirelessly with a smartphone. Smart threads in the fabric are capable of reading user’s biometrics, for instance heart rate, body temperature, and dehydration, among others that otherwise a smartphone would be incapable of registering on its own. By integrating the smart garment with a fitness app, the latter can use the real-time data collected on the body’s actual performance to accurately monitor workout sessions, giving a range of possibilities to use this data to differentiate the service offered by the app. As a result, the end product could stand out in the vast pool of apps while facilitating the user to efficiently reach their personal goals. It is a path for app developers to consider, as the growth of standard, smartphone-based apps is surely going to be limited.

11/08/2017by EOS Intelligence EOS Intelligence No Comments

Edtech Start-ups in China – Collaborating with Larger Players to Stay Afloat

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Over the past five years, China has witnessed a steep growth of the online education market with the emergence of start-ups offering economically accessible online education for students of all ages. This growth has been largely driven by favorable government policies, broadening internet reach, and an increased willingness of the population to spend money on education. Nevertheless, many Edtech (education technology) companies in the country have gone out of business during their first few years of entering the online market due to adopting unprofitable business models. This led to apprehension from investors, contributing to a slowdown in investment flow to the online education start-ups. What could online Edtechs do to turn the tables?

The global online education market has been promising due to an increasing demand for more ways to access education. The industry has received investments of US$7.33 billion globally in 2016, the highest investment in the history of the learning technology industry. The two markets that witnessed the highest investment in this sector were the USA and China, which recorded US$4.18 billion and US$2.06 billion, respectively, in that same year. As the second largest destination for online education, China has witnessed a soaring number of new online education start-ups thanks to investment from both government (Chinese government invested US$1.07 billion in 2015) and private sources (mostly venture capital). Moreover, by 2020, the Chinese online education market is expected to reach US$94.93 billion, growing at a CAGR of 34.6% from 2013 to 2020.

In recent years, China has been switching its focus from manufacturing to a service-oriented economy. Consequently, local demand for low-cost education has increased since more people seek to improve their skillset and successfully function in the dynamically changing economy. For this reason, the government has included the development and promotion of internet and education in its 13th Five-Year Plan (2016-2020) launched on January 19th, 2016. According to this plan, non-governmental players (e.g. foreign investors) are encouraged to participate in the education industry and domestic private companies will be allowed to collaborate with foreign innovative education companies.

With the Chinese government support along with investments from venture capital, equity investors, and other private funding, the Chinese online Edtech start-ups have been considered to offer a strong growth potential, which lead to a number of them being established in the past few years, including online learning platforms such as Tutor Group and Hujiang. However, despite the appealing scenario of the thriving industry, a recent study conducted by China Online Education Research Institute stated that only 5% of all Chinese Edtech start-ups were capable to gain profit during 2015-2016. According to the study, 70% of the start-ups recorded losses, 10% reached a break-even point, and 15% went out of business during that same period. Since a significant percentage of online Edtechs in China were unprofitable and some even went out of business between 2015 and 2016, investment flow slowed down in 2016. A more rational and cautious approach from investors could cause start-ups growth to slow down significantly.

EOS Perspective

China is already the second largest market of online education after the USA. With a large and increasing number of internet users (around 50% of China’s population) and a large spending assigned for education in most Chinese home budgets, China might seem perfect for Edtech companies to thrive.

However, Chinese online education market is highly competitive with crowded landscape. This is a challenging environment to operate in since majority of online Edtechs in China offer a very similar product with little to no differentiation, and most of these companies have failed to build a strong product that would allow them to compete against other players in the Chinese market.

Under this scenario, investors do not seem to be willing to wait for five years or more for their investment returns, causing them to shift focus and funding streams to other segments of technology-enhanced learning market, such as simulation-based learning, game-based learning, and educational robot companies. With the slowdown in the investment during 2016, Edtech companies that are highly dependent on investors’ funding in order to continue their operations found themselves in a particularly difficult situation, with 15% of such start-ups going out of business by the end of 2016.

In terms of investment flow, 2017 might not offer any drastic improvements in the operating environment for online Edtech start-ups, therefore these companies need to look for ways to counterbalance the slowdown in investment in order to stay in business. Beijing-based online language platform, 51Talk, acquired its counterpart 91Waijiao and all of its users in 2015 as a way to expand its business. This is an example of how these market players could attempt to turn the tables to their favor, benefitting from building partnerships or joint ventures with larger players in the market in order to scale-up and generate funds to sustain their operations.

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