Global Economics

Free Mobile Services Set to Take Off


Blyk's British launch of its ad-sponsored cell-phone service targeted at teens and young adults has traditional mobile operators nervous

Just when you thought your kids already spend too much time on the phone, along comes a new service that offers free mobile-phone calls and text messages for 16-to-24-year-olds who agree to accept advertising delivered onto their handsets. On Sept. 24, the hotly anticipated startup Blyk made its debut in Britain. Mobile carriers and Internet companies around the globe will be watching its development closely.

Though still nascent today, the introduction of advertising onto mobile phones could hugely disrupt the current business models of mobile operators, which are built on charging for airtime, text messages, and other services. If a significant number of consumers opt instead for free, ad-supported wireless, billions in revenues could shift from traditional subscriptions to advertising. Though currently worth only about $1 billion worldwide, mobile advertising is expected to grow to as much as $19 billion within the next five years.

The Stampede to the Phone

To be sure, Blyk is starting small (BusinessWeek, 11/3/06), aiming initially only at Britain. But, says Shaun Collins, a mobile analyst at mobile consulting firm CCS Insight, "If Blyk's model is successful and a significant number of 16-to-24-year-olds engage with this powerful new channel, it would put a very big chink in mobile operators' armor." Collins says such a shift would leave "revenue and handsets outside of mobile operators' control."

The Web world has already taken notice of the potential. Internet and computer giants such as MySpace (NWS), Google (GOOG), Yahoo! (YHOO), and Microsoft (MSFT) all are trying to extend their franchises to mobile. MySpace announced Sept. 24 that it is launching a free, advertising-supported mobile version of its popular social networking Web site that will work via all U.S. wireless carriers and allow users to send and receive messages, comment on pictures, post bulletins, update blogs, and find and search for friends.

Yahoo has a strategic alliance to develop mobile advertising with Vodafone (VOD), the world's largest international mobile-phone company, and in August bought Actionality, a Munich-based company that specializes in inserting ads in mobile games. Microsoft, whose mobile operating system already resides in some phones, purchased ScreenTonic, a French mobile advertising company, in May. And the global mobile industry is abuzz with rumors (BusinessWeek, 9/6/07) about how search giant Google is expected to roll out its own "gPhone" or a specification that would allow others to create one. The expectation is that it will try to transplant its successful advertising model to mobile phones.

Operators' Advantages

Advertising on the Internet, especially pay-per-click ads alongside search results, quickly erupted into a multibillion-dollar industry, and online companies hope mobile phones will follow a similar trajectory. It is no surprise, then, that not only established Internet players but newcomers are getting into the game. London-based startup Trutap Limited, for instance, announced on Sept. 24 that it had raised a new round of funding to launch a free advertising-supported service aimed at 18-to-24 year olds. The Trutap service lets users do instant messaging, send group messages, upload text and pictures to blogs, and send pictures via mobile. A beta-release version of the service, which will be launched later this year, will offer service in more than 200 countries on over 150 phone models, says Chief Executive Doug Richard.

While there are dire predictions about Web companies moving in on the mobile sector, incumbent mobile operators retain serious advantages that could be hard for upstarts to match. Among other things, they know how to run networks, send bills to customers, and deal with regulators. Most important, they control information about their customers' usage habits, making it harder for new entrants to steal revenue via ad sales. Analysts say many Web companies likely will end up striking revenue-sharing deals with traditional mobile operators.

At the same time, the mobile industry itself is increasingly embracing mobile advertising. Nokia (NOK) is in the process of closing a deal to buy EnPocket, a U.S. company specializing in mobile advertising, as part of its strategy to offer its own advertising-supported mobile services and help mobile operators do the same. "It is clear that this is going to be a serious multibillion-dollar opportunity," says Tom Henriksson, director of Nokia Ad Service, a division launched in March by the world's largest handset maker.

Most major mobile-phone operators either are testing or launching mobile ad services, Henriksson says. Virgin Mobile USA helped lead the way with its Sugar Mama service. In Europe, France's Orange (FTE) has introduced advertising on its mobile portal, while Vodafone earlier this month announced plans to launch a new mobile advertising service in the Czech Republic. "Advertisers need reach, and we are building the reach through operator services and other services to help advertisers to go into mobile seriously," says Henriksson.

The New Breed of Operator

But traditional operators have more than the likes of Google to worry about. Blyk, one of a new breed of operator (BusinessWeek, 9/18/07) called a mobile virtual network operator, or MVNO, is providing competition of a different sort. Its CEO is Pekka Ala-Pietilä, the former president of Nokia, and the roster of other Nokia veterans on the staff includes Marko Ahtisaari, who was previously director of design strategy for the Finnish mobile giant.

Blyk leases space on Orange's network in Britain for a fee, but it built and operates its own back-office operations, allowing it to retain full control of valuable customer information and avoid having to share its advertising revenues. It is exclusively targeting 16-to-24-year-olds on an invitation-only basis. Users must fill out detailed information about their lifestyles, areas of interest, and brand preferences. In exchange for agreeing to accept targeted advertising via text messaging, members get 43 minutes per month of free mobile voice service and 217 free text messages. The service is accessed through SIM cards mailed to new users, who simply plop them into their existing phones.

Early market testing showed that consumers did not want to be bugged by advertisements during voice calls, says Ala-Pietilä. Instead, Blyk is limiting its targeted advertising to text messaging. For example, advertiser L'Oréal sends a text message asking users which celebrity is most like them. Depending on the user's text response, a sample answer might be "Then you'd suit Eva's shade of color riche (sic) star secrets, Caramel," complete with a picture of the star wearing the lipstick.

Brands on Board

Blyk also plans to append targeted text-only ads to the end of incoming text messages. Besides L'Oréal, Blyk already has signed up 45 brands, including McDonald's (MCD), Coca-Cola (KO), Borders (BGP), Microsoft's Xbox unit, Ford (F) and Colgate (CL). The company hopes to attract young people in Britain with prepaid mobile accounts (rather than subscriptions) who rely heavily on text messaging. It has plans to expand into the rest of Europe and may eventually consider expanding globally, Ala-Pietilä says.

Services such as Blyk could someday turn mobile operators into mere "dumb pipes," say analysts, carrying traffic that earns juicier revenues for others. "Near term the impact will be fairly limited," says Collins of CCS Insight. But eventually, advertising could transform the business model of mobile services and open the door to a host of new players. Unless, that is, the mobile players manage to keep hold of the ad bucks for themselves.


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