Content is the Cup Holder

Why do carriers care about content for mobile phones?

As eMarketer pointed out in an article last month, mobile content is a $20 billion niche in a trillion-dollar industry. That is more than enough to get entrepreneurs and investors excited, and a lot of people have already gotten rich selling ringtones and games. But from the carriers’ perspective, it is 2%.

True, the market for mobile content grew by one third last year. At that rate it might get to be 10% of carrier revenue five years from now, depending on how quickly voice revenue declines. How much time do you spend thinking about products that might represent 10% of your revenue in 2011?

“I thought that mobile data revenue was already much higher than that,” you protest. Yes, but:

mobile data = content + messaging + internet access

Messaging includes SMS (text), MMS (pictures), IM, email, video calls, and whatever is to come; internet access means means wireless connections for laptop computers. Right now messaging brings in three times more revenue than content and still has plenty of room to grow. 3G modems for laptop internet access are very new but the coverage is so much better than WiFi that some people have ditched WiFi altogether. Messaging and internet access explain how mobile data got to be 14.1% of total revenue at Verizon Wireless. Messaging alone explains how the Philippines just became the first country in the world to see data revenue overtake revenue from voice.

Mobile content (games, ringtones, TV, maps, music, location-based services, and everything else) is much less important. Moreover, content must be sourced; dozens of technologies are involved and hundreds of business relationships must be managed; and everyone wants a cut. That makes content far less profitable than messaging or access, for which marginal costs are negligible. So why do carriers care about content at all?

One reason often given is that some category of content is going to break out and generate a hundred billion dollars in revenue. Before the telecom bubble burst in 2000, this was how European carriers explained the prices that they paid for 3G spectrum. But those investments have long since been written off and forecasts for mobile content are today quite modest. Carriers no longer have to be seen putting a lot of effort into content in order to justify their stock prices.

In my view the real reason that carriers care about content is that content is to mobile phones as cup holders are to new cars.

27% of car buyers in America would consider switching make or model to get the perfect cupholder. And no, it’s not just Americans anymore.

This is rational behavior. Once you’ve decided that you want, say, a two-seater car for the city or an SUV, there’s very little to choose between the dozen models available except for details like cup holders, keyless entry, a telescoping steering column, or a power outlet on the center console.

Consumers choosing a wireless carrier care most about price, handsets, and in the US, coverage. But in most countries there is very little to separate the leading carriers. Enter mobile content. When a customer is standing in Radio Shack or Carphone Warehouse trying to choose a new carrier, one rock star, one new game, one favorite TV show might make a difference. Carriers use content to sell voice.

Why is this important? Because if you are in the business of developing content for mobile phones, this explains a lot of carrier behavior that otherwise seems irrational or unsustainable.

They don’t pay attention when you say that you can increase their ARPU, because you can’t
They will market a category - say games - but over time they have no interest in helping you to sell your content, because the success of your business can never make a difference to theirs
They care about brand-name content, even if the application sucks
Brands like American Idol and Disney pose no threat to the carriers’ business; brands like Google do
A three-month exclusive may be worth more than three years of revenue from non-exclusive content
If they marketed games last quarter, they will not market games this quarter; they need something new
A third-rate app that allows them to claim parity with a competitor is a higher priority than a first-rate app that customers might actually buy
If you do start making money, they will cut your revenue share; allowing a content vendor to get powerful isn’t worth the risk
Categories of content that are actually hard to add or might generate negative publicity are at the bottom of the list - think location-based services
Mobile search is now necessary to help new customers find the content that made them buy the phone in the first place; having the best possible mobile search is not interesting
Mobile advertising will be a bone thrown to content providers; it can’t possibly help carriers to sell phones

Comments to “Content is the Cup Holder”

Andreas Constantinou says:

November 15, 2006 at 11:20 pm

Hi Jason,

This is an eye-opening summary of the value of mobile content. In my experience, operators spend quite a lot of time thinking about the value of mobile content, even if it’s only 10% in 2007,8,9..etc The reason is that mobile content is seen as the only growth area, where voice revenue is stagnating. In saturated markets (mostly Europe, and US to some extent) the game is about retaining (i.e. reducing churn) rather than attracting consumers. In addition, the only way of keeping people talking on the phone today is promotional tariffs (which is why tariffs are so complicated today!), not data.

Your argument about content being to mobile phones what cup holders are to new cars is true and an enlightening parallel to the completely different car industry. However, I wouldn’t say that content is now used by operators to sell more voice - at least not by design. What I mean is that operators use content to attract and retain subs, but not explicitely to sell voice. They suffer from innovational inertia and concepts like these are hard to surface into actionable strategy. BUT THIS IS WHAT THEY SHOULD BE DOING. And the bright exception here is T-Mobile’s MyFaves, which uses home screen customisation + content to *explicitely* sell more voice. What a brilliant strategy and execution - no doubt it will be copied by T-Mobiles in Europe, too.

Overall a thought provoking post.

Andreas

Alex Kerr says:

November 16, 2006 at 4:38 am

This is a good article, but one must remember I think that (if true in the real world) it’s a statement solely on the carrier’s view of mobile content, rather than the future of mobile content itself. And the point is, carriers will continue to become less and less important in that future. The walled garden of the operator portal was a big player in sales of mobile content, but as off-portal sales and mobile internet access grow, what the carrier says or thinks about mobile content will matter less and less and influence will reduce.

There is rapidly increasing pressure on operators globally to allow customers flat rate data plans instead of per-minute or per-KB charging, just as happened with fixed line internet and it’s subsequent explosion. When this artificial dam breaks in the near future (as it surely will) there will be similar dramatic growth of the mobile internet. Ways of navigating around it and finding useful stuff will increase and improve, and the definition of “mobile content” will dilute - I mean we’re talking about any data to a multimedia computer in your hand basically, so you can’t really define it in terms of a limited set of file formats (ringtones, pics etc.). This also means that every new mobile internet site that springs up is not only mobile content itself, and potentially chargeable for (depending on it’s value to the user), but also a potential storefront to sell more specifically defined content (items of audio, video, imagery, LBS data etc.).

In light of this, I think the most optimistic forecasts of the future mobile content market will be closer to the truth.

Alex Kerr
alex@phonething.com
http://www.phonething.com

Jason Devitt says:

November 16, 2006 at 7:43 am

Alex,

I am trying to explain the behavior of carriers to companies that are trying to sell mobile content to or through carriers. There are still a lot of those companies, and most of the time they go in with the wrong pitch (”we have a cool app!”, “we can raise your ARPU!”), get no love, and rail against the carriers for being ‘dumb’ or ’slow’. Maybe the carriers are dumb, maybe they aren’t. My point is that there are very good reasons for them to dismiss those claims, and that the successful mobile content companies - like EA Mobile (Jamdat) in the US and In-Fusio in Europe - understand this and build it into their business models.

Most of the companies selling content directly to consumers (D2C) in the US and Europe still rely on the carriers for billing and provisioning via premium SMS or MMS, even if only indirectly through an aggregator. My argument still applies; it explains why carriers haven’t prioritized billing and reporting mechanisms for D2C content vendors, introducing direct-to-bill charging, or fixing the problems with WAP push.

The only way to cut the carriers out of the loop completely is to go off deck and rely on advertising revenue and/or require consumers to enter a credit card number into their phone. While a lot of revenue will come from these sources over time, I don’t think that the most optimistic forecasts for mobile content will be realized if those are the *only* revenue models available.

Ram says:

October 15, 2007 at 3:44 am

Interesting article. It shows what is the net revenue value for the MSO. In my view (looking into the glass) initially it will be that content will be like a cup holder but will move into a more fundamental mode -where the thin lines betw voice-data -will go and It will be like the engine that powers the cars. Net will become defacto mobile based - mobile devices based to be particular and data that would be displayed will be stupendous- nearby Points of interest, entertainment, infotainment, discounts coupons, maps,payment mode, comparison shopper, bargain price retriever, deals announcer, Spot on aggregation of user purchases - aggregate buys to drive bargains etc.,