gss is about to get better. father of the gps system talks about one of the most useful inventions. mystery solved. why does safeway sell so many gift cards? the bright idea. >> smart conference this morning with reporters sara lacey of tech crunch and michael copeland of "fortune" on press here. >> good morning. have you ever been in a safeway and noticed all of those gift cards near the checkout stands? not dozens of cards or hundreds,

thousands of gift cards for everything from build a bear to olive garden. if you're like me, you wonder, why does safe way sell all those gift cards. >> the answer is actually quite simple. safeway opens the company that makes the gift cards. when you buy a chili's card, safeway subsidiary blackhawk networks holds those funds transferring them to the restaurant as you spend it down. now some cards blackhawk handles entirely, a turnkey solution for smaller operations and painless way for companies to get their name on a card. others are more like a partnership, from safeway in northern california to vaughn's in southern california to the dominic chain in the midwest, these cards are just about everywhere. of course, it's not the plastic card where the heavy lifting takes place, it is as they say

the network. blackhawk's computerized system that adds and deducts, keeping track of millions of cards carrying billions of dollars. founding and president of blackhawk network, a subsidiary of safeway. welcome to the show. let's start with how this works within safeway. you're a subsidiary and sort of an independent company as well, they leave you alone? >> that's right. we started the company nine years ago inside of safeway, became a subsidiary and now service an array of retailers. >> even safe way's competitors. >> we do. we have linked to our network, 87,000 points of distribution here in u.s. and in 15 countries. >> what is the business model. is it better than selling bananas? >> i think so.

>> some places in the grocery store there are huge markups but most of grocery store is fairly thin margins. this could be a cash cow for safeway. >> it's very profitable. one of the most profitable categories for the retailer that's we service but has oesh strategic benefits as well. you're bringing new traffic and new visits into the store. you think about it, giflt cards have become so popular, the nrf quotes that they are america's number one requested gift and has been for multiple years running. and consumers use them for different occasions so they are going to go in seek of these cards and visit their grocery store more frequently. it's a convenient location and because of the selection we offer, given 98% repeat rate. >> nothing goes bad and they don't spoil and you don't have to refridge rate them but are the margins that good? >> you have tremendous velocity but don't have huge margins.

you're selling a payment product, right, that's what we're merchandising and the business model works where the card partner that's represented pays us a commission which we in turn share the majority of that with the distribution partner. and that's an exchange for the space and merchandising and marketing. >> who has the float? if i have 100 bucks on an olive garden card. where is the $100 sitting? >> it's resident with the issuerer. the funds flow back. >> all $100 goes back to olive garden -- >> minus the commission, correct. but the great thing about the retail brand of cards is that we also can offer them to the distribution partner, the grocery chain free of charge so there's no inventory expense because that card carries no value until our network activated it during the transaction. >> what kind of gift cards do the best? you have movie theaters and a lot of kind of mid market chain

restaurants and some higher end things. >> it's a great question. i have to honestly answer it that 80% of the purchases are planned and when the consumers walking in they are thinking about the recipient or occasion. nordstrom's i might be thinking my mother-in-law loves that. my nephew, mcdonald's, you have to have the right selection in all categories that work well for gifting. what we do see in the fashion cards are good sellers at holiday and increasingly the open loop, you have to distinguish between closed and open loop. >> i don't know the difference. >> an open loop card wore visa and mastercard those are most popular. >> knows act as debit cards, in other words. >> you know, they are supported by a deb et transaction but the difference is a gift card, it is a one-time use product.

you can't reload it. we do offer reloadable products but those are not intended at gift cards, they are for every day spending. >> a part of sara's question, there are -- i'll make up foot locker i don't know if that's actually one. >> yes, it is. >> there are some obscure cards where you think, really, they have a gift card? >> right. >> why do you have a foot locker gift card? >> you do market research on this or take anyone that comes to you? >> perfect question. we do quarterly benchmark studies and we have a panel that we go out to across the country and look in different geographies at the brand and force rank them every quarter and ensure our displays are carrying the cards. about 80% of the content on our displays are exclusive to our network as well. so that's a huge advantage. let's go back to the benefit to the distributing retailers.

think about the fact that the grocery chain is now selling a fashion card or dining card or fuel card. they are participating in a share of the wallet that they weren't otherwise participating. going back to is it better than bananas? it's certainly incremental to banan bananas. >> nine years ago you started? >> that's right. >> was there a big gap that safeway saw in the market? there were gift cards nine years ago, right? >> there were, but just kind of coming up the command curve. you can only get best buy at best buy. consumers were adopted them but what really got me excited about it was research we did about working women. which i can relate to, especially working women who are moms. they are about 70% of the gifting cards. $280 billion industry, the gifting industry.

>> 280 billion? >> yeah, that's the size of gifting. if we can take the gift cards and put them in the most frequented shopping environments where they are with more frequency than any other shopping environment, we save them time. they have on average 30 minutes of discretionary time. >> out of that 280 billion, how much goes unspent and i know a lot of it is in the bottom of my cloengs someplace and who keeps the money. >> that's what the retailers love about this. >> it's a myth. it's a really good -- >> said that in quarterly earnings calls, it's not a myth. >> let me make sure i call fi the $280 billion represents a gifting market. the gift card market is estimated to be about 80 to 90 billion. then the open loop gift card market, 25 billion. so just to qualify that.

going back to this issue of cards getting lost, breaking, exactly, and -- >> or it's worth a dollar at olive garden. >> there can be breakage on a card. all of the cards in our program never expire. let's say you found the card two years later, you could always redeem the balance on that card. i think the important thing to recognize is the merchant so olive garden in that case really values your visit. when you come in and spend that gift card, you will on average spend 40% over the face value. >> isn't that a liability as well? because it never goes away. it's not as if the dollar, they get the dollar -- >> exactly. it's hanging over their head as we well. >> it's a liability that hangs on their books. so they would much prefer you to come in and have a visit to the

location. the other thing is the behavior around gift cards, if you ever received a gift card you might relate to this. it's like found money. i get to go buy something and treat myself. i'm not going to look for what's on sale. i'm going to get the expensive -- >> the open loop ones, i could still buy groceries with a visa card. i can't buy something practical at nordstrom. >> we'll take a quick break and be back in just a minute.

welcome back to "press here" we're talking with talbot and michael copeland. >> giflt cards seem sold of old school, i don't know another way to put it. for example, if i put money in

my itunes account, they'll sendmy 'reminder that i have money to spent or amex launched this whole electronic payment system that resides on my phone as an app. are gift cards that i take, breakage, are they on way out? what growth are you seeing? and what's the future of the gift card? is it going to be in my phone? >> i think it is. we are actually already the largest online distributor of gift cards and we have developed both mobile apps that are on the iphone as well as in facebook and social network environments. while today it's a very small percent of gift cards, it's interesting because it allows for both the physical and virtual delivery and more importantly technology allows us to develop ways that consumers get more value. they never lose that balance. >> am i able viable my phone to send sara a gift card for

nordstrom's, i think what she wants. >> can i do that by a app on my phone? >> gift card mall we have an app available today and we have an app in the facebook environment. if you think about it, gift sg a natural commerce of social network. you don't really go to facebook to buy things but you go there to relate to your friends and gifting is part of that. >> that's where most people see birthdays unfortunately. >> and wish lists. >> you were saying earlier the vendor itself the olive garden as the random example gets the money ahead of time. therefore you have no liability in this. if smith's pizza, now i'll make it fictional, goes bankrupt and there are gift cards involved, blackhawk steps away. it's not -- >> we've been very fortunate in that we always carry the best

brands we haven't had dk. >> the border's and blockbusters, perfectly fine companies have gone under. >> this is true and none of them have pulled back on balances of the gift cards, the consumer is protected. in other words they go out of the way to ensure they are still -- >> from a business standpoint it's not a liability? >> it's not a liability on our part, right. >> i'm curious about how the culture has changed. ten years ago when you started it was considering a little garish to give someone a gift card. the idea is you didn't put thought into it. and now saying it's one of the most requested things. did you luck out or do something to help that along? >> i would like to take credit for that -- >> it's a great question. i think gift cards are inherently viral. people do get concerned it's not personal enough then they get a lift card and love the experience. it was interesting with the

economy being down and more pressure on people's pocket books than ever before. gift cards became increasingly popular. i think it was consumers having a positive experience themself that gave them the confidence that this was a gift that they knew would be received well. >> recently in the news a company not yours got into trouble for a teenage debit card in which the fees were just outrageous. you check your balance and it cost you a dollar. you roll more money, it will cost you $10. you sell the visa cards, what are your policies and how do you stay out of trouble? >> those are general purpose reloadable debit products designed to help people who want an alternative who don't qualify for a credit card or have had bad experiences with a bank in terms of nsf fees and other feeses that can get assessed. we believe in having number one very kpetive pricing we're out

with pay power, it is a reloadable debit product gives the convenience and security of a normal debit product but you can't overspend and all fees are disclosed. >> are you in the finance business? >> we're not the bank. we're what's called the program manager. the funtsds refunds reside in a bank in a fdic account. >> let's say it's $100 and i'm charged $100 or $105. where is the initial money being made? >> when you purchase the product there's a $3.95 charge up front for the product. that product can be reloaded or they can have their product redirect deposited free of charge. >> it is going to be growing. >> it's one of fastest growing segments of the payment industry and i think it will continue to

be going into the future. jaf lynn shared some research they do each year looking at credit usage. 2007 we saw 86% of consume erps using some sort of credit, this year estimated to be $46. >> the president and founder of blackhawk network. up next, the future of gps from the guy who helped invent it. back in a moment.

welcome back from 37 degrees north, 121 degrees west or san jose california, i can get more precise than that using a gps receiver. within about 20 feet and soon within about 2 feet. >> you think gps is cool now, just wait until the latest constellation of super precise

satellites are in orbit. >> my fellow americans -- >> the biggest upgrade to the gps system since the year 2000 when president clinton ordered the pentagon to flip a switch and provide civilians with access to high resolution positional data. data that up until then only the military could get access to. these days, of course, gps chips are everywhere, from devices in cars and iphones. >> carry gps -- >> and soon thanks to the new 2-foot resolution provided by the new satellites, you may find them in everything from dog collars to fedex packages. bob run ard was one of the original engineers who brought the gps system to lich in the 1970s. joined by michael copeland and

sara of tech crunch. could you have anticipated in almost every single car, in computerized phones people carry in their pockets, that this would be the future of gps? >> probably not back in the 1970s because in those days the equipment was fairly huge. we did have one objective in the 70s to build a manned portable unit that a soldier could wear on his back and it would only cost $20,000. so we really didn't see it going that far forward. fortunately the reduction of electronics has helped us get down to the point where we're likely to sit in just about anything. >> this was designed originally for the military. was there an anticipation it would have a civilian component in the early days? >> it was actually part of the sales that we did through the pentagon and that was that we saw that we could put this equipment in airplanes and improve trans oceanic route control without having controllers so yeah -- >> civilian airplanes.

>> yes. >> was there the anticipation that some day an average civilian would have any use for that kind of positional knowledge? >> i don't think so because the equipment was so huge. >> there was a "60 minutes" piece 0 years ago that was worried about gps, it might be used by bad guys. it was never really -- >> that was the whole reason why it could only work for 50 feet as opposed to 2 feet. >> and privacy concerns. >> going back to the bad guys using it, back in the 80s, you talked about president clinton turning off a certain feature. when we conceive it we wanted the feature on so the bad guys couldn't use it but they needed the cryptology keys and that was a headache. >> it was more to make it easier on the military than to make it better for consumers. >> it was two-sided.

we had to get better for the civilians but it made it difficult in iraq to be able to use it precisely. >> we cover a lot of start-up at tech crunch that are all hinging businesses on gps chips within cell phones. increasingly there's been frustration it's not yet as precise as it could be. you're seeing like company that's will measure location by matching sound patterns or color which will measure location more precisely by your lens and your phone and what that tells you. do you think that the iphone is going to out innovate gps or do you think gps will be the core of location-based services? >> that's a great question. it's a compliment of sensors that will make the service people see better. gps will get improved over the next few years with newer satellites are launched. the equipment we have today won't be able to use that improvement. we'll have to have new equipment. and of course there are these

complement tri things. the iphone has a magnetometer in and accelerate o meter and they improve the overall behavior of the system. >> the next generation of gps, you cannot use a current gps recher to get that. but that's far enough away that iphone 7 or 8 -- >> you'll get a new phone anyway. >> right. the radios inside my phone and most new phones now, the hardware part of it is a commodity, right? you talked about $20,000 personal gps unit. where's the value now in kind of location as you see it? >> sara talks about the start-ups but they are mostly all software companies, right? >> they are all dependent on the electronics in something else. cell phones, for example, early on we understood a gps only

needed a certain number of transistors to make it work. but now that it's smaller, it's better. going back to one thing you said, we're a little concerned about will i stay be able to use what i have? you'll still be able to use what you have today but you won't see the improvements. >> where does telenab make its money if gps is run by the government itself? >> our primary flagship product is the nef gator, basically a phone navigation system that is paid for by subscriptions. >> you sell that to the cell phone companies? >> we don't sell the software but sell the services that allow it to work. routing computing and business listings. >> you're being the back end -- when i'm typing something on my phone, somehow telenab will be involved in that? >> that's correct. the second model is more appropriate for the newer phones

and also for our products in cars. >> the question that i've always won derped about when it comes to gps, because anyone can use it. were we to go to war with canada and i know they are suspicious, how do we handle that? the soldiers on me end can use gps. >> just go north. >> right, i don't need gps for that. >> how do you let one set of soldiers use gps but not the other set or is that possible? >> going back to the switch we talked about, we could reenable that. >> but then our soldiers couldn't see it. >> no because we modernized as well. it is now an electronic process. >> the gps unit that an american soldier has has the ability to see gps after they throw a switch. >> after they turn on the corruption influences under military control.

>> can you utilize that or would that affect ships at sea as well? >> it can be localized but i'm not sure that's really what we want to do initially. we may not know where the problem is. we want to wait and find out. >> tell me when we get to the 2 foot resolution, what happens? we got about a minute left. what happens in the world? >> there's all kinds of weird things people talk about. for example, one of the interesting things, the postal service gee yoe coded all of the postal boxes in santa cruz. i don't know whether they envisioned a robot that would stuff your mail in or what because you could get down to the mailbox, what about a robotic system to pick up your trash, put the can where it's suppose the to be and the machine comes to get it. >> driverless cars? >> could be. >> unless you're within 2 feet you may crash. >> i hate drive. let's try it. >> we have to go. bob bernard, the father of gps and we appreciate you being

here. we'll be back in just a minute.

week. another welcome to michael copeland. an unusual version of press here, just me and three young start-up entrepreneurs. thanks for making us part of your sunday morning. ♪

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