Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
Another CTIA show has come and gone. There was plenty of talk of new applications and wireless spectrum. The discussion continued regarding what “opening a network” means, and if we truly want that.
However, under the surface of positive announcements, there was an undercurrent of conversations that point to a foreboding cloud on the horizon. As we as an industry discuss targeted mobile advertising, mobile social networking applications and mobile banking applications of all shapes and sizes, the reality remains that we are still having trouble billing for a $1.99 ringtone.
To be fair, the majority of the problems seem to surround off-deck content. The off-deck market is a sizable market obviously. MultiMedia Intelligence’s latest estimate for the operator share of off-deck music revenue is $400 million in the U.S. When we add in content, platform and digital commerce services companies share of the off-deck music market, there is more than enough money to go around. Clearly, the problem is not revenue, but the operators still want a bigger share. The problem lies in the fact that no one seems to be make any money. It is a problem that needs to be addressed quickly or the ramifications could be drastic.
Why the Urgency?
An innovation which was championed by the iPhone and has received less attention than other features is that the handset as an open platform with an open OS and an open data pipe. Google’s Android and LiMo (a Linux-based mobile platform operating system) are the next elements of a developing trend. In June 2008, Nokia responded and announced that it was acquiring the remaining shares of the Symbian licensing company, essentially given its personal, strong validation of the trend.
Essentially, we are seeing the rise of a new class of mobile devices that are application-centric with voice functionality. These devices are internet browsers, music players, text messengers and e-mail devices first – and they still make voice calls.
The result is that 2007 marked an inflection point in the handset market as handsets migrate towards open-platforms. This creates a definition problem for mobile content. A subscriber can receive content on a mobile device in one of three methods.
1, Content can go through an operator’s deck and/or be billed to the subscriber’s bill using tradition mobile content method (on-deck).
2, Consumers can find content from a third party, purchase the “off-deck” content and have it billed through their operator
3, A subscriber can access content on the open Internet on devices such as the iPhone and bill the content to a credit card, PayPal or other similar means.
In the third scenario, operators do not see any of the mobile content revenue. Since MultiMedia Intelligence defines mobile content as content that is delivered to a mobile handset payment is made directly to the carrier’s bill, the third scenario would be defined as “broadband content,” similar to that of iTunes content being consumed on an iPod.
The result is that there is entire ecosystem of Internet content and billing companies that are salivating over the prospect of handling transactions from mobile phones. Google, Visa, eBay and Amazon are simply a sampling of the companies with mobile conquest in mind. In speaking with one off-deck mobile billing companies, I inquired as to whether entities such as iTunes could crush the mobile content industry if the mobile industry did not solve the billing quagmire with off-deck content. Her response was, with a rather somber tone, “It could.”
What is source of the problem?
The problem is that the ineffectiveness of off-deck billing processes are causing the entire market to suffer to lose a percentage of the transaction, commonly referred to as revenue leakage. The problem is exacerbated by the fact that carriers have large customer acquisition costs and large investments in handset subsidies, so they are pre-disposed to side with the customer in billing disputes when there is a dissatisfying billing problem.
Revenue leakage typically finds its source from three areas. The first of the three big buckets of revenue leakage comes from refunds. This cost of sales is typically 5%, but I have heard high estimates in the 10% to 20% range. The second of big three buckets of revenue leakage occurs in the payment process. This occurs by providing content to a user without being able to collect payment. The last source of revenue leakage comes from customer service calls. Having a CSR on the phone for 20 minutes over a 99 cent ringtone results in considerable cost.
The most concerning issue is that it does not seem to be getting any better; it seems to be getting worse. When I first started covering the market, revenue leakage had grown to 10% of revenue. Conservative estimates now put it north of 17%. It is no wonder that the operators want more money from each off-deck transaction
It does not have to be this way
In my conversation with one mobile billing expert, I asked whether solving the mobile billing problem result in more revenue for everyone and eliminate the pressure from the operators. His comment, “It would.”
However, please do not infer from this article that the operators are without culpability for the malaise in mobile billing. They have at least equal ownership of the problem. There is little or no commonality in standards and little cooperation amongst the carriers to solve the problems. Since they are typically the ones beating the drum to which everyone must march, they obviously need take ownership for driving solutions, solutions that are implemented as an industry rather than in silos.
In addition to harmonizing the standards and process across the operators, some have suggested eliminate the problem of the shared shortcodes. The proposal has a lot of merit. The cost of a shortcode is palatable if one is a large mobile retailer however it is punishing if you a small retailer. As a result, shortcodes end up getting share among multiple vendors, each running multiple campaigns. The result can be an exponential problem of transaction complexities, creating a spaghetti mess of transaction trails that are virtually impossible to sort at the end of the day.
Some Progress
There have been some recent developments in the billing arena that are helping to address some of the problems. In my conversations with folks like mBlox, BSG Clearing, MXTelecom, OpenMarket, and VeriSign at CTIA, it is clear that mobile commerce service providers are looking to drive thought leadership in an effort to solve the problem.
One innovative approach is to pre-authorization of transaction on the fly. Instead of instantly processing a transaction, the billing provider predicts that likelihood of being able to receive payment from the recipient. Factors such as past history, payment status or type of contract could be considered. If a rating was too low, alternative payment or delivery methods may be required.
WAP billing is other innovation. Instead of following multiple SMS messaging transactions, the billing off-deck processing would be process directly in the carrier’s billing system using WAP. The advantages include pre-approval of the off-deck merchant, improving the quality of the source transactions, and greater billing transparency, improving detail and traceability of activity. There is little data regarding the impacts of WAP billing in the US; however, the results from other geographies suggest that WAP billing can have an exponential reduction in refund rates.
Finally, we have seen efforts to identify “irregular” or non-compliant activity. One way is to analyze traffic patterns to identify suspicious patterns of billing traffic. The goal is to quickly identify programs which are not in complian
ce so as to minimize the size of potential problems. Another method is to monetize Internet, print, magazine and TV advertising for non-compliant advertising for off-deck programs.
Some Hope
Even the though the threat of the Internet commerce companies looms large, the mobile industry has an inherit advantage. It has a relationship with the customer. Although this is a liability in revenue leakage issues, it is a strength when it comes to customer acquisition.
In a recent report by MultiMedia Intelligence, we noted that if a marketer is trying to sell goods or digital content to Hispanic teens, it is important to note that Hispanic teens tend not to have forms of payment necessary for electronic commerce. Even in the 16-17 age group, only 9% of Hispanic teens have a credit card. Being able to charge digital content to the cellular handset is a key component toward servicing this market.
A Final Thought
I apologize for the “fire and brimstone” tone at times. However, it is clear that there is a mature and tested ecosystem of Internet player that look to mobile phones as yet another port from which they can do commerce. Through a decade of market Darwinism, they are efficient and effective at what they do. If the mobile industry cannot accelerate that progress that it is making in mobile commerce, it is quite possible that mobile commerce will happen without the participation of the mobile industry.
Questions or comments about this column? Contact Frank at frank@multimediaintelligence.com or contact RCR Wireless News at rcrwebhelp@crain.com.