U.S. carriers are demanding more of a place at the content trough, content provides say, whittling away at already onerous revenue-share deals. And publishers are feeling the squeeze.
Ringtone vendors and others have long complained about operators that pocket the lion’s share of content transactions. Carriers typically demand 30 to 40 percent of all revenues for licensed games and polyphonic ringtones, and can keep more than half of sales of more generic content.
And with profit margins from voice traffic continuing to narrow, those percentages are increasing. Operators have begun keeping as much as 70 percent of revenues from content they brand as their own, forcing some content providers into a race to the bottom line.
Research and Markets took note of the worsening situation last month, claiming most business models for content around the world are “hopelessly inadequate.”
“With the exception of Japan, Korea and China, very few sustainable models are currently in operation,” the market research firm noted. “The rest of the world is waiting on [mobile virtual network operator] models that provide content providers with the freedom to distribute their own products and manage their own billing and customer service.”
Steep revenue-share deals are often cited as a prime factor in the rise of off-deck transactions in the United States, but trying to sell directly to consumers can be even more daunting. Direct-to-consumer vendors must drive users to Internet storefronts-a formidable and costly task, particularly for less well-known brands. And operators are beginning to demand nearly as much for off-deck transactions as they do for on-deck sales.
Getting content providers or analysts to discuss such issues publicly is difficult, however. Several insiders requested anonymity for fear of incurring the wrath of major operators.
“I think (the carriers) started with a certain revenue share and they’ve increased it over the years,” said an executive from an established content provider to Tier 1 operators who wished to remain anonymous.
“What’s happening is that some smaller (content) players are going out of business.”
Indeed, some see Dwango Wireless as the first casualty of the growing revenue-share problem. While Dwango certainly faced other issues-it spent substantial licensing fees for major brands including Rolling Stone and Napster-most insiders agree that the burdensome business model helped seal the Seattle-based publisher’s fate. Dwango, which rebranded as Dijji Corp. late last year, shuttered its operation in June.
Consolidation in the industry is to be expected, of course, for a number of reasons. A crush of ringtone publishers and other developers flooded the market in the early days of wireless data, leading to a glut of companies hoping to strike deals with an ever-decreasing number of carriers. And much of that content is mediocre, unlicensed stuff that operators can get anywhere, according to an executive from one content provider with global distribution through dozens of operators.
“A lot of content companies are offering, for lack of a better word, crap,” said the executive. “It’s commodity content, clip-art stuff, easily accessible ringtones. I don’t think it’s the carriers’ revenue models that are driving these competitors out, it’s the business maturing.”
The controversy surrounding carrier revenue-shares is not new, and the operators have always had the upper hand. Wireless entrepreneur Shawn Conahan has written of a phone call he received from a Verizon Wireless executive during his tenure at Moviso L.L.C., a ringtone provider he later sold to InfoSpace Inc. The Verizon Wireless representative demanded an additional 20 percentage points, and Conahan had no choice but to accede immediately.
“There was no flying out for a meeting,” Conahan posted last year in a blog for his new company, Intercasting Corp. “There was no (PowerPoint) deck. Had I said no, Verizon Wireless would have ended our relationship. He made the same call to … every other ringtone provider.”
Operators have some compelling arguments for insisting on such revenue splits. They have spent billions building out their networks and are pressured by stockholders to recoup those investments. They own the most coveted real estate in wireless-the carrier deck, where consumers are far more likely to shop for content and applications than any Internet storefront. And when a subscriber can’t download a ringtone or buys a rotten game, it is the carrier-not the publisher or record label-that typically must handle the problem.
But content providers point to the fact that operators take 100 percent of all data charges, and generally don’t spend much to market their content offerings. And, they argue, it’s time for operators to use the 3G networks they’ve built to boost traffic and increase data revenues-by lowering their splits.
“All of that investment is pretty much done, so this is gravy,” said Harry Kargman of Kargo, a New York-based content provider that next week plans to launch FeverMobile.com, a direct-to-consumer effort. “If they can drive billions of dollars worth of transactions and take 10 percent of that, it’s just pure gravy.”
Such a scenario seems to have worked in Japan, where NTT DoCoMo Inc. is credited with spurring the mobile content market by taking only about 9 percent of revenues. The operator’s i-mode service is being replicated by carriers in other markets including Europe-with less generous revenue splits-and some believe U.S. carriers are beginning to take note.
“Carriers are getting greedier. They are coveting a higher portion of the pie,” said one well-known analyst who requested anonymity. “At the same time, we are seeing operators examine the efficacy of the i-mode model in the context of the U.S.”
It appears one of the new, content-focused MVNOs may be best positioned to adopt such a model. A smaller operator could be more flexible with revenue share scenarios, insiders say, and might be more wiling to risk short-term revenues for a long-term play centered on mobile data revenues.
In the meantime, though, some see Dwango’s fate as a harbinger of increasingly tough times for content providers.
“I hope that it becomes a wakeup call,” said one executive from a ringtone provider. “Maybe carriers will start to realize they need to build a sustainable ecosystem for business in the long run.”
