NOVEMBER 27, 2006
Wireless World
By Kate Norton
Europe's Wireless Future
Mobile operators will need to be leaner and explore a range of offerings—including ads on phones—some leading experts say
Mobile operators such as Vodafone (VOD) have long been content to fly solo as they make the costly push beyond voice calling into data. Many European carriers reckoned they didn't need to form partnerships to make good on upwards of $100 billion spent on the government-issued licenses needed for delivering advanced wireless services such as Internet access.
They may be singing a different tune, judging from a spate of recent announcements. Vodafone, for example, announced on Nov. 14 that it was forming a partnership with Yahoo! (YHOO) to put advertisements on mobile phones. Then, on Nov. 16, Hutchison Whampoa's British wireless operator 3 unveiled its X-Series, which bundles wireless broadband applications including Google (GOOG) and eBay (EBAY) for a flat fee, an effort aimed at encouraging customer adoption of data services
(see BusinessWeek.com, 11/21/06, "Skype and Sling Hitch a Ride").
BusinessWeek.com spoke with some of the industry's leading thinkers about the evolving business models for cellular operators. Edited excerpts follow:
John Delaney, principal analyst, Consumer Research, of London-based consultancy Ovum
There is a trend in mobile telecoms for less of operators' revenues to be coming from the end users, and it's a fundamental shift in the business. Traditionally, it's been about driving traffic onto your network and then charging the end users for that traffic. The Internet changes all that. Pretty much everything that's on the Internet is not paid for by end users, but they've got to be paid for by somebody, and that's usually an advertiser.
Hutchison's 3 is an interesting operator because in many ways it's at the leading edge of the encroachment of that Internet business model into mobile telecoms. Mobile telecoms in Western Europe and some other markets is now essentially a commodity business. So operators have to start offering their customers new services [including some] not traditionally associated with telecoms, like search, TV, and so forth.
But they have been trying unsuccessfully to fund these services in the traditional way, by getting end users to pay for them. The idea of paying a subscription per month to use a particular service, for example, is proving fairly unpopular with users.
So we're now seeing operators starting to move toward the Internet model: not charging users—or not charging them so much—for the Internet and to try and interest advertisers to use the mobile phone as a site for advertising. That's been difficult in the past for a number of reasons. First, because it's been difficult to get much in the way of advertising on the phone; and second, because phones have been used primarily for voice communications, getting advertising in there is always very intrusive.…
[The advertising model] is completely new for mobile, and the potential is huge just when you think of the numbers involved in terms of worldwide subscribers. And there's interoperability between the phones, unlike the instant messaging services on the Internet, which are closed communities. So that's an enormous audience for advertising.
Not only that, but operators have a lot of data about what their users are doing. Those characteristics by themselves are enough to make advertisers salivate at the potential. The key is finding a way to unlock that potential without alienating the user. If it can be done, the potential is just phenomenal. It would dwarf TV and the Internet as a medium for advertising.
Dean Bubley, founder of Disruptive Analysis, a London technology consulting firm
I have long thought that the sort of walled-garden approach from operators is unlikely to succeed. In particular, I have huge doubts that operators should get directly involved in content, for the most part. There's this fear of what is rather crudely referred to as becoming a "dumb pipe," and my view is there is far too much of a polar distinction of being a full content service provider or dumb pipe.
I think there is a much more realistic, obtainable, and potentially profitable "smart pipe" middle ground, where the operator is providing not just connectivity and access but other services around that. Those may be services they provide to the end user, such as guarantees of a particular quality of bandwidth or speed, or services provided to third parties in terms of location and billing support and various other program interfaces.
In terms of business models, clearly the various levels of advertising support…seem to be gaining a lot of currency. Clearly, there is an awful lot that still needs to be done, though, in making sure that the user experience is acceptable.
I don't see mobile advertising in the short run making a huge contribution—it won't grow as fast as, say, Google has in terms of the PC-based Web simply because Google took a relatively understood format and just tweaked it. Here, it may be back to square one.
And while clearly the upside is that it's got a lot of creative people, all the creativity in the world doesn't solve things like designing handset user interfaces. People always underestimate how difficult it is to get software to work on a good range of mobile phones, whereas most software will work on most PCs and virtually all Web browsers.
John Strand, CEO, Strand Consult, a wireless consultancy in Copenhagen
If you remove [short messaging] from data, data accounts for 2%-3% of operators' revenues. So, even if data explodes dramatically, it will never be able to compensate for the revenue [that] voice is generating today. More and more operators in Europe are offering flat-rate calls on your mobile phone. In the U.S., you have the buckets with 1,000 or 2,000 minutes.
The profit for the operators is that you can't use the minutes, so from that perspective the future of the mobile operator is simple: He will be lean. For an operator, it's about driving down his costs, ensuring his fixed costs are very low, scaling down his business, reducing subsidies, outsourcing a good part of his business; he will not develop mobile services like you do today.
I see the future mobile-operator business model as more like a supermarket. What is a supermarket? A logistic point, with a cash register and a customer base. All those products are put into the supermarket; they do the marketing so there's traffic into the store. You go into the store, pick up a product, and then you go to the cashier and you pay for it. Then the supermarket shares the revenue with the supplier.
The winning business model in the future is not the one that Vodafone is using. It's not the one that 3 is using. If you look across Europe, the most successful operators are the ones focused on driving down fixed costs, ensuring customers are paying as much as possible flat rate and then having some product on top of that they can add some extra revenue on. And those services, they will not buy them in the future, they will get them from the service providers on a pure revenue-sharing model.
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