I am amazed how so many individuals - from telecom execs to ad agency reps - at so many industry events can share the singular belief that flat-rate data charges will boost usage and jumpstart a new era in the mobile Web.

After all, the argument goes, all-you-can-eat broadband charges most certainly helped make data services a routine part of daily lives. In fact, the arrival of flat-rate data marked a tectonic shift in user behavior and industry business models. Won’t history simply repeat itself once we all have similar tariffs in the mobile space? Won’t we all get rich as a result? And won’t it all convince the brands to (finally!) get involved in mobile big-time?

Don’t hold your breath.

A lively presentation by Andrew Bud, executive chairman and co-founder of mobile transaction network mBlox, a company connecting content providers and mobile operators at the heart of the off-portal experience, at the recent Mobile Content Conference organized by Visiongain in London, correctly challenges us to think again.

True to his style, Andrew passionately and professionally argued that unlimited flat-rate data plans may spell relief for a select portion of mobile users (in fact, mobile operators would break out champagne if just 25 percent of users buy into flat-rate data packages). However, the vast majority of users will pay data charges and - with it - the cost of receiving mobile advertising. As he put it: “Most people will basically pay for advertising and that is unacceptable. Some will see it come out of their flat rate bundle and that is not really OK either.” What’s more, it’s only a matter of time “before the fines come pouring in.” (It’s hardly likely that regulators will sit idly by and watch this for long.)

This is further complicated by the advance of rich data services, such as mobile video, and the groundswell interest among content owners in providing ad-supported content and TV-commercial-like mobile advertising.

Why mobile video? Because mobile content - a marketplace obsessed with ringtones and images - is a clear case of been there, done that. Total premium revenues are flat in most mature territories, and M:Metrics, a comScore company, reports that ringtone revenues are down 20 percent in EU5 in just one year. As Andrew sees it: “Mobile content needs refreshing, and mobile video is the next big thing.”

Granted, we could argue whether mobile video is the new premium content category, but, for now, let’s just accept that it is gaining serious traction, as evidenced by the rise in off-portal video (M:Metrics reports 9.3 percent of EU5 users have tried mobile video) and the surprise success of iTunes films, proving that people do pay for portable video content. (Andrew later told me that his sources at iTunes film vendors such as Shorts International report selling video short content has become a “significant revenue stream.”)

And then there is the rise of mobile search verticals, such as Veveo, whose vtap mobile search service (profiled here) is built from the ground up to let users browse and snack mobile video content from the Web. Veveo is convinced mobile video will be bigger than mobile email and, judging by the usage stats Daren Gill, Veveo VP/GM recently shared with me, it could be right.

Short videos will certainly be central to content discovery, mobile search, and search advertising - and that’s just the start. Andrew argues short videos are also destined to become part of our mobile advertising experience.

I’ll put on my Jonathan MacDonald hat now and take this a quantum step further. Links and display advertising that direct users to a landing page are fine if the goal is to get users to the shop/destination. But if the end-game is about engagement and capturing the attention/passion/emotion of the visitor, then rich-media could be a perfect match (although SMS can still do the trick if the value prop covers the bases). In a nutshell, advertising is about two-way communication and there are no free lunches. Consumers demand something in return - even if it’s just a laugh, as this video illustrates. (Thanks to Andrew for providing the link and expertly making this point in his presentation. Actions do indeed speak louder than words.)

On the topic of mobile video and advertising, I would like to point out that commercials on our phones are closer than we think. During Mobile Europe 2.0 in Barcelona I had the pleasure of connecting with Paul Rossi, VP Marketing at MMCast, a company that covers the bases to bring video advertising to a mass market. Neil Edwards, founding CEO of dotMobi, has joined the company, so I suspect we’ll be hearing more about them soon. And if you read what the company offers you’ll see why.

In a nutshell, MMCast’s patented technology lets users see video advertising (played during the download and buffering period) that is also targeted (using MMCast’s Smart Technology) to the user’s gender, age and location demographic. A feature that caught my attention: Metadata transmitted with the ad can activate designated handset keys, making them”soft keys” - allowing users one-click access to the advertiser’s website. Paul tells me the idea here is to enable easy access to coupons/offers that can be sent back to the user’s handset in real-time. Check it out in this YouTube video. They may have to work on the relevancy of the ad to the wallpaper, but the technology does deliver the goods.

In the meantime, the question arises: How is rich media - let alone rich mobile advertising - going to make the mainstream if users are forced to pay the costs, even from their bundles? Right now, companies can’t even give it away for free. The blogosphere is full of examples that “free” content can literally cost consumers a bundle once the data charges are factored into the equation.

Indeed, Andrew had us howling when he presented this small print to accompany a short video give-away offer. “Free! …at no further cost if you have an unlimited data plan unless you are close to your bundle limit in which case it may cost you GBP15, or data charges that may be anything from nothing if you are a contract user on Vodafone to GBP9 if you are a pre-pay user on O2 unless you are a pre-pay user on Vodafone or T-Mobile in which case it will cost you up to GBP1 if you have not spent that much already.”

How can operators deliver content users appreciate - and start generating the new revenue streams they desperately need - without ripping them off?

They could (as they have) restrict content to operator portals - but experience shows it’s a losing business that flies in the face of the trend to off-portal. They could strike deals with some publishers and zero-rate their content ads. However, most operators have a horrible track record when it comes to choosing blockbuster content, and even the cool ones have found out the hard way that negotiating these deals doesn’t scale to a billion-dollar business. Finally, operators can preach it will all be different once unlimited flat-data arrives. However, Andrew’s argument shows that flat-rate charges - because they are neither universal nor compulsory - will nonetheless force many consumers to pay for ad-supported content.

By way of background, there is also a backlash in the fixed space of ISPs coming out against flat-rate packages and Apple’s iTunes, offers that encourage users to consume bandwidth-eating video content. As this post shows, flat-rate data actually creates many more problems than it will likely ever solve.

Against this backdrop, Andrew suggests the answer is Sender-Pays Data, a new model that ironically borrows heavily from the approaches that have gone before it (such as 0800 numbers, and the postage stamp).

Put simply, brands would buy data delivery from the operator so no customer would pay transport charges. The result would be truly free ad-supported content and mobile advertising. More importantly, mobile operators would effectively receive revenue for all mobile advertising - even adverts delivered off-portal - because they are selling data in very much a wholesale model.

The same Sender-Pays model would work for content owners and providers, who would be able to set a concrete price for their content (Retail 101 tells us price transparency is the first step to selling successfully). “It’s the same model that exists in bulk text, and the bulk text business is huge for carriers….It’s an extremely stable, mature, and well-established business model.”

Do the math and it adds up. Andrew offers the example of a video short on offer for GBP1.50. When the carrier charges the customer GBP1.50 for the content, it immediately pays approximately 20 pence in VAT. Between the carrier and the transaction network, something between 90 pence and GBP1 is paid out to the publisher, so the carrier plus the transaction network keep about 30-35 pence. Most of that is kept by the carrier. At that point, the content shop or publisher is making 90 pence to GBP1.

“Let us imagine that in order to deliver that data, the shop will probably have a cost of goods sold and have to pay the carrier 20 pence to deliver it, meaning it effectively pays 20 pence for the postage stamp.” At the end of the day, it’s a 20 pence postage stamp on the content that the operator then delivers. The shop or publisher has revenue of around GBP1, the cost of goods sold was 20 pence and the net revenue 80 pence. That’s a good business. The carrier is also doing quite nicely. They’ve made approximately 30 pence on the transaction, plus 20 pence on the delivery, so they’ve made 50 pence.

Connect the dots, and the content provider has made 80 pence and the transmission chain has made 50 pence. (To recap: 50 pence (carriers et al) + 80 pence (CP) + 20 pence (tax)=GBP1.50 exactly.) “The content provider has got enough money to pay his rights and to promote his wares, and the operator is doing very well, thank you. There is more than enough revenue made and no reason to feel that in any way the main business is being cannibalized.”

I greatly look forward to the discussion this post, I hope, will inspire. In the meantime, I’d like to showcase a rather obscure report that does a great job addressing operator fears that Sender-Pays Data (and off-portal business in general) could relegate them to the position of a dumb (and potentially poor) pipe.

This research by mBlox, conducted in conjunction with Cambridge University’s Judge Business School, found that mobile operators who fail to offer their services to other companies in their business ecosystems are leaving money on the table. (Billions to be exact.)

Put simply, the research found that carrier revenues will grow to $8 billion by 2011, compared to $3 billion in 2007, from providing value added and enabling services to off-portal publishers. (Currently, the majority of carriers’ off-portal content revenue comes from premium SMS, SMS, and short code rental.)

Moving forward, the main revenue and drivers will be:

• WAP billing - $2.5 billion: WAP billing will create a universal two-click charging model with transparency, which protects the consumer and enables business models for a wide range of content including video, music, games, and mobile advertising.
• Sender-Pays Data - $1.7 billion: Sender-Pays Data can not only unlock the mass market for rich media to the mobile phone; it can also allow for revenues to be distributed throughout the value chain while protecting the consumer from unintentional bill shock. Transparent pricing will boost consumer trust in these services, a virtuous cycle that will ultimately unlock additional revenues for the industry.
• Handset and subscriber data - $1.5 billion: Handset and subscriber insight information will provide a series of data look-up services that will provide insight into the handset and its owner. These new services are crucial for the effective distribution of content and the development of many applications, including mobile advertising and location-based services. Carriers either have already or can infer these data, and can charge for them thanks to their indubitable value to content providers. (And I should add that time is running out when it comes to location information. Google has made huge progress in coming up with approximate location data that has proven good enough for a slew of services and service providers. If operators aren’t faster on their feet they will have lost the race before it is run.)

My take: Vendor spin aside (we must appreciate that mBlox would likely sit in the center of these transactions), the model has clear benefits for all the players in the mobile business ecosystem. In fact, Andrew tells me mBlox is gearing up to start trials with some major operators soon. While off-portal may not mean big bucks to operators (yet), it has high margins attached to it and deserves more attention and support from operators. Operators must wake up to the value of offering off-portal providers value-added services (of which Sender-Pays Data is one) and providing a framework for their business ecosystem to flourish - otherwise their worst nightmares (think dumb and poor pipe) will most certainly come true.

This entry was posted on Tuesday, July 29th, 2008 at 9:27 am and is filed under Mobile Advertising, Mobile Content, Mobile Research, Mobile Search, Mobile Social Networking, Personalization. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.