Mobile operators as content providers

Risky business

Analysis We are all now familiar with the dilemma faced by the mobile operators – revenue from traditional cellphone services is slowing, despite the boost from camera phones and mobile email, just as carriers are trying to pay off the huge capital investment in 3G.

And to make matters worse, software houses, content owners and handset makers are all biting into the mobile value chain. New research from Booz, Allen Hamilton argues that, with mobile data the main driver of new revenue streams, carriers should cash in through integration – offering not just the network and handset but their own content too. But transforming into a content provider is a strategy beset by risk, in terms of timing, user demand, carrier competency and competition from Nokia and Microsoft.

The biggest operators are well down this track already, with Vodafone Live! clocking up 3m users on its first birthday this week, and other multimedia services chasing it. The handset makers are incorporating features into their phones that support ever more sophisticated content delivery, including, this week, Nokia’s first television phone. All this with a view to boosting all-important upgrade sales in the more saturated markets and luring users on to handset models and operator plans that are data-heavy and so carry higher average revenue than voice.

That this is the only route to growth for carriers and phone makers has become a truism that is scarcely questioned any more. Nearly all the major operators have multimedia data services now – the grandfather of them, NTT DoCoMo’s i-Mode, has been emulated by T-Mobile’s T-Zones, AT&T’s mMode, Orange World, Verizon’s GetItNow and a host of others.

But there are disturbing doubts surfacing about the ‘content is king’ route – doubts that echo the dotcom era, when for a couple of years every web site operator believed it had to provide rich content. This created a massive boost for content providers, followed by a subsequent crash, not only because the dotcom bubble burst, but because it became clear that the only sites that needed sophisticated content were those in the content business themselves – publishers, information service providers and so on. Companies selling groceries online generally did not.

Similarly, the fact remains that a majority of people still use their phone almost entirely for voice calls and a bit of text messaging. This will change as the handset and the network become better adapted to content delivery – with ubiquitous 2.5G and 3G networks, larger color screens, decent quality video and so on. But the experience of UK operator 3, which now offers video calls at the same rate as voice, shows that, while phones are rapidly becoming a more amenable environment for content, this does not necessarily mean that operators will be able to charge premium prices.

Content business models

All these factors mean that only a few operators will succeed in achieving their mobile data ambitions – and even they will face challenges from handset makers who want to offer the mobile environment themselves. Key business choices must be made now, and as in most content-driven businesses, the winners will rely on a few highly desirable offerings – the hottest games titles, music and video clips, the first workable television service, for instance – and on the power of brand, the area where Live! is scoring highly, in Europe at least. This puts considerable power in the hands of the owners of this critical content.

When the offering is right, the revenues and profits do follow. DoCoMo has moved almost 40 million of its 46 million Japanese subscribers to i-Mode and claims i-Mode users typically spend 20 per cent more per month than voice-only customers. Nokia is targeting fourfold growth in mobile data revenues to €180bn by 2007. But the right choices need to be made now, rather than adopting a dotcom-style scattergun approach, assuming that quantity of content will win over quality.

Operators have two choices – to focus on driving volume of data over their networks in order to grow revenue from increased traffic, but missing out on capturing value from the content itself; or to take the higher risk approach of providing a complete mobile experience under their own brand, as Vodafone is doing, competing on the range and quality of their offering not just volume. For the larger operators with high 3G investments, the latter is the more likely choice, but it is risky. It involves companies with business models based on cost per minute and network efficiency, which left third parties to take the content distribution risk, moving into an unfamiliar world of content marketing and user experience. The carrier-branded feature phones with their unique user interfaces were the first step in this direction, and the evolution of the operator as content provider is the second.

Content partners, chosen for their brands and also for their expertise in presenting and marketing their content in an attractive way, will be vital, as will closer ties with handset makers to ensure that the latest cellphones can deliver the multimedia experience effectively. Some operators are even getting into creating content under their own brand – SK Telecom has a boy band specifically formed to promote its 3G service – but this is, in most cases, a step too far. Most users will select content such as games, ringtones and clips on the basis of its own brand, not the operator’s.

Content also changes the pricing model. So far most operators have clung to their traditional pricing by time or by volume of data consumed. But those that are serious about content will have to introduce a new charging model that prices per download, particularly for premium content. This will fit with user preferences too – Booz, Allen Hamilton found in its research that 69 per cent of European mobile users would prefer to pay per download, while only 14 per cent wanted to pay per megabyte of data.

The role of handset makers

The operators are taking on a major challenge. To succeed as content providers they must move from their relatively simple business models of the 1990s to understand a whole range of complex factors from user interfaces, security and pricing to content channels and marketing.

And the carriers are not the only companies trying to take this market – Nokia, Qualcomm and Microsoft all believe they can create a content-driven mobile world under their own brands that would relegate the carriers to their former role of network provider and pump most of the real value into the business chain of those three giants.

Other technology companies, including nearly all the handset makers, are working far more closely with the carriers, seeming to accept that operators will invest in the brand and the software platform and that the phone makers will profit purely from increased demand for their higher range models. Vodafone and Orange lead Europe in the closeness of their control over handset design, something that was unknown outside Japan until recent years. Sharp, for instance, makes a GX10i model specifically optimized for Live! and branded by Vodafone.

This is certainly not the view of Nokia, which is in a branding head-to-head with Vodafone that threatens to have a highly disruptive effect on the mobile industry, especially now that the Finnish giant has set up a dedicated division for Media. This will house its most advanced, content-oriented handsets, such as the new 7700, the unit’s first product, launched this week.

The 7700 is Nokia’s first ‘media category device’ designed to provide “a mobile internet and personal media experience”. It has a full browser and large 65,000-color touchscreen optimized for internet and video content viewing, and also incorporates music and video streaming, VGA camera, FM radio, MMS and content creation tools. The handset, which will ship in Europe in the second quarter of next year with a retail price around €500, can also play television clips, but its successor will have the option of a full TV receiver and tuner.

Not that executives in Nokia Media use the word handset very often – these products are heavily distinguished from their humbler cousins in the Mobile Phones division, and are presented as multimedia devices, lifestyle gadgets, content hubs, anything but phones, and always under the increasingly powerful Nokia lifestyle brand.

Qualcomm – with Brew and its software platforms for the CDMA world – and Microsoft also have their own portals, content, user interfaces, and applications, though are far behind, in the handset business, in terms of brand. All these parties are constantly hunting not just for more high profile partners but for new types of content that will differentiate their offering and increase the amount they can charge.

Television on mobiles

The latest content type to catch the operators’ eyes is television, with some looking to mobile broadcast satellites for music and TV delivery to handsets. SK Telecom is working with Toshiba-backed Mobile Broadcasting Company (MBC) to share satellite infrastructure costs and both parties will offer subscription mobile TV and radio services from next spring. Several handset makers are integrating TV tuners into their devices, including Samsung, Sharp, NEC and now Nokia. The carriers are divided, even in Asia, where mobile multimedia usage is most advanced. NTT DoCoMo’s CEO Keiji Tachikawa told reporters recently that TV on mobile will “surely trigger a battle over battery life and a battle over talk time”, arguing that users will spend less time talking and will drain their batteries.

Vodafone Japan and NEC are to launch a service, however, with an NEC phone that includes an analog TV receiver and tuner. The manufacturer claims TV is “at the top of the list of consumers’ most wanted features” in Japan.

Some handsets are available that can receive free analog terrestrial broadcasts but these pictures tend to break up when transmitted to a moving device. Terrestrial digital TV has far greater potential, and in Japan, one-thirteenth of the digital TV transmission band has been set aside for broadcasting to mobile devices and Sony has already demonstrated a digital tuner module that works in a handset with an OFDM chip.

Anssi Vanjoki, executive vice president of Nokia Mobile Phones, is pinning his hopes on the emerging Digital Video Broadcast-Handheld standard, which is designed to conserve battery and cope with moving receivers. This will take a couple of years to be commercialized and to pass some countries’ regulatory hurdles, but in the mean time, many operators are starting to pump television clips directly over their networks. In Europe, Telecom Italia and 3 have led the way, the former’s sports clips service operating even on a 2G network.

Chipmakers like Philips are leaping on the bandwaggon, and Qualcomm is developing an architecture called "media flow” for video streaming and TV, although it is cloaked in secrecy right now. Any evolution in the sophistication of mobile content benefits the chipmakers of course.

Intel showed its hand earlier this month with a partnership with Sony to optimize Sony Music Entertainment’s applications and content services for the Intel mobile architecture. This is a classic Intel approach in the mobile world, working with key partners to ensure that the most desirable applications work more effectively on its chips than those of rivals, thus boosting user and carrier demand for phones based on Intel PCA. More content partnerships can be expected soon.

Short term tactics

While operators examine their business models and their future in content, they still have the short term problem that the majority of users are voice-focused and are not upgrading – or have no access to – next generation networks and handsets. Even Live! has less than five per cent penetration of the Vodafone subscriber base (five per cent in the UK, three per cent in Germany). According to a new report by Research and Markets, 95 per cent of operator revenue is still voice-based, most of the remaining 5 per cent is from messaging, and only 0.5 per cent comes from GPRS, WAP, or EDGE data services. And JupiterMedia discovered that US consumers, at least in the next 12 months, are highly price sensitive and favor low cost, basic voice handsets over paying more than $49 in order to get cameras and multimedia features.

And what of second tier operators? They do not have the resource to create their own content service, attract the biggest partnerships or spend millions on branding campaigns. They will be confined to trying to increase revenue through the old traffic model, as outlined above – or they provide a new revenue opportunity in their own right for their big rivals.

NTT DoCoMo pioneered the practise of licensing its i-Mode service to partners in order to expand its reach in countries where DoCoMo does not operate itself. The ambition was to set a global standard, something that has not been achieved – i-Mode still has under one million users in Europe, despite licensing deals with Holland’s KPN, Bouygues Telecom in France, Telefónica in Spain and others. But the pattern has been emulated by Vodafone, which has seen Live! taken up in France by SFR and in Switzerland by Swisscom.

It is encouraging to see the major operators thinking long term and devising creative business strategies that will finally reap serious revenue and margin from their investment in 3G and 2.5G networks. But they still face a period of one to three years when those networks are not widespread and when demand for content and multimedia is immature or unproven.

Content will become a major differentiator and it will accelerate the inevitable shake-out of the operators, especially in Europe and the US. But even Vodafone, with its apparently strong start, needs to keep delivering what most of its users want for 2004 – competitive voice services – and keep a keen eye over its shoulder for Nokia’s moves to create its own content business and relegate the operators back to their old role.

© Copyright 2003 Wireless Watch

Wireless Watch is published by Rethink Research, a London-based IT publishing and consulting firm. This weekly newsletter delivers in-depth analysis and market research of mobile and wireless for business. Subscription details are here.

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