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Book excerpt: “Harnessing the Mobile Internet”By
Yankee Group Research Inc.’s Eliot Weinman has produced an executive guide explaining who the mobile Internet players are, how the ecosystem is evolving and how market trends are breaking barriers to grow future revenues. An exclusive excerpt.
As broadband becomes untethered and mobile, operators worldwide are struggling to meet the unprecedented consumer and business demands brought on by the proliferation of advanced devices, services and applications.
To meet their customer’s needs, operators around the globe have already committed more than $10 billion to evolve their networks using next generation mobile broadband technologies that are inherently designed to deliver high speed data over the Internet.
In telecommunications industry parlance, this is referred to as meeting the demands for the explosion of data traffic, as the original cell phone networks were primarily designed to transmit voice, not data.
As a consequence, the evolution of the global mobile communications market toward an open-Internet-based environment is inevitable.
We are now in the early phase of a mobile Internet tsunami, the impact of which will be felt in all corners of the globe.
Yankee Group forecasts that by 2015, global operator revenues from mobile Internet services will be $66 billion.
This figure does not include revenues generated by the broader mobile Internet ecosystem participants (such as content providers, device manufacturers, chip makers, etc.), nor does it include revenues generated from mobile browser transactions.
The cool applications that you, your friends and family are enjoying on your new mobile devices today will soon become museum relics like the cell phone you had several years ago.
Within a year, you will have access to a wide variety of new forms of consumer electronic devices enabled by advanced mobile Internet technologies.
For example, you will have the ability to conduct two-way video calls from your mobile device, along with access to a multitude of other types of real-time video applications and services.
“Harnessing the Mobile Internet” was written to address the following major questions:
• What has been the evolution of the mobile Internet?
• What are the components of the mobile Internet?
• What are the major trends that are accelerating the growth of the mobile Internet market?
• Who are the key stakeholders in the mobile Internet ecosystem and how can you identify and evaluate the likely winners and losers?
• How do participants build viable business models to profit from the expansion of the mobile Internet?
• What will be the evolution of the mobile Internet over the next five years?
Mobile operator business models
When mobile operators first started to gain revenues from data and content, most of this was closely tied to their own networks, especially with the SMS boom.
When Web applications were first supported, they were also kept under tight control, within the operators’ branded portals or “walled gardens.”
But user demand, especially as they got accustomed to open Internet access on the move via Wi-Fi, forced carriers to break down the walls and support “off-portal” content via partners.
This led to various complexities – the operator could no longer ensure quality, and so often had to issue refunds for content that had not downloaded effectively: plus revenue leakage and even fraud became greater threats.
Although operators traditionally kept about 35 percent of the revenue in a paid-for off-portal content deal, the margins were under pressure, and a new basic model was needed for revenue sharing and service delivery.
This has started to evolve, but an even greater challenge has arisen – how can the operator make money from free content and untrammeled Internet surfing over its network, where it cannot charge more for the user’s activities than a monthly, usually flat, data fee?
In this scenario, the operator is in danger of becoming merely a “bit pipe” to carry data and content, with the revenues from that content and/or advertising going to the owners and developers, and even the device makers.
Most operators will play multiple roles in the MI business chain, but there are five primary approaches.
First, similar to Verizon Wireless, they can make limited moves forward supporting open browsing, open devices and open applications.
Verizon Wireless is placing the weight of marketing behind services like VCast and new smartphones that are Web-optimized but remain under the operator’s control.
In this scenario, at least in the short term, operators like Verizon and AT&T, are relying on various factors to ensure that open Internet services remain a small percentage of customer activity.
They include: difficulty of navigation, compared to the simplicity of the carrier portal and interface; lack of device subsidies if the user has to provide his or her own device; and fears about security and privacy.
A second approach is to embrace the MI aggressively, and to some extent accept the role of bit pipe (preferably with a new network that can support the new model) and provide large amounts of bandwidth at a low flat rate, by utilizing efficient new technologies with low cost of delivery.
The Sprint-Clearwire initiative is taking this approach, favoring openness from day one (though it admits it may have to subsidize some devices to stimulate initial uptake).
Another example, also without the burden of a legacy network and its economics, is 3G-only European carrier 3, part of Hutchison Group.
In this model, there is less attention to “killer apps” and content that is unique to the operator, who focuses, ISP-like, on core Internet services like email, VoIP and instant messaging, rather than on developing differentiated content, which needs a whole new set of skills and partnerships.
A third option for operators is to differentiate, and attract new revenues, by owning and controlling the network; and sharing these with third parties as well as running a retail bit pipe.
This approach pressures the operator to maintain cutting edge infrastructure, which can only be cost justified, over time, if the operator leases capacity to other providers, rather than running the network purely for its own benefit.
Operators that have moved into radio access network (RAN) sharing and MVNO wholesaling are emulating the wholesale approach common to the wireline mobile operators, and will experience increasing business pressure to become the much discussed ‘bit pipes’, carrying huge quantities of Internet traffic of all kinds.
They may do this on a white label basis, or exploit the economies of an advanced network technology and compete by offering the most attractive tariffs and flat rate service bundles, under their own brand.
A fourth approach is to become a content and services portal, attracting users through differentiated and unique multimedia offerings and creating a complex Web of content partnerships.
As we will see later, this model leaves the carrier some of the control and margin to which it is accustomed, but requires a complicated value chain with a constant tussle to dominate the revenue share.
In some cases, and as an extension of the previous option, operators can become a retail brand.
Operators like T-Mobile, are looking to reduce their commitment to infrastructure, via outsourcing or partnership, and to become brands that, in time, will fall little short of an MVNO.
T-Mobile is focusing heavily on establishing a unique, operator-defined user experience for mobile broadband, with services like its web ‘n’ walk flat rate Internet offering and integration with Wi-Fi hotspots.
Although it will work with third-party interfaces and services such as Nokia’s Ovi, it aims to retain pole position in the value chain by creating a unique combination of applications, user interface, tariffs and bundles to keep user loyalty, and to balance increased usage with high value services.
Outside central Europe, T-Mobile could extend this concept through full MVNO relationships.
Finally, an innovative fifth model comes from UQ Communications, a KDDI-led joint-venture in Japan that is building a mobile broadband network based on WiMAX. It launched recently with own-branded services but also via the top three electronics retailers, all of them operating as MVNOs on the system.
This gives UQ entirely different routes to market compared to the KDDI business, and the ability to appeal to a range of user bases as targeted by its partners.
Also, the MVNOs will push the services via devices such as notebooks and, in the future, media players – enabled by the support of the new IP networks for over the air provisioning, and full interoperability of any devices with any networks (as in Wi-Fi).
As with the fixed Internet, the organizations that will initially generate revenues will be content and software houses, operators and device makers.
But an opportunity exists for almost any business to communicate with its customers and partners in new ways, or deliver new services, using the MI, thus improving its profitability, customer retention and market share.
To realize this potential, they must target customers with a genuine need or desire to access services from a mobile rather than fixed device – because this is part of their work pattern (field sales forces), or their lifestyle (consumers who are accustomed to their phone being their primary device rather than their PC).
Preferably the new communication methods or services should rely on a feature enhancement that only a mobile network can fully support such as location-based services, ad hoc communications and push-to-talk, or unified messaging.
The key platforms that will underpin a huge range of business-to-business and business-to-consumer services over the mobile web will be:
• Banking and mobile commerce, including payment engines
• Social networking engines (e.g. Facebook, Mosh)
• Mobile Web services frameworks (e.g. Oracle, Microsoft)
• Mobile Web 2.0 and Web 3.0, including collaboration and new content methods
• Unified communications and messaging (e.g. Cisco, Microsoft)
• Supply chain and CRM systems
• Mobile advertising engines (e.g. Google)
• Mobile multimedia, including television
Mobile advertising is all the rage – or is it?
From a hype perspective, yes; from a spend perspective, no. Its promise and sheer potential are fueling the hype as opposed to today’s market reality.
The hype machine is being driven in large part by speculation, including the dozens of venture-funded companies focused on enabling and building value in this nascent marketplace.
Operators also recognize the potential opportunity, but they are moving at glacier-like speeds as they balance the potential upside against upsetting their core transactional and maturing (and highly price competitive) consumer business.
However, let’s be realistic – the market is just getting started. And in this early stage, fragmented buy/sell environment, the market is far from significant and far from rational.
For advertisers, mobile media is about reach, frequency and measurement. We are getting there with reach, and advertisers are spending more.
One of the major publishers interviewed for this research indicated that the average advertising campaign size has doubled (from the $20,000 to $50,000 range to the $40,000 to $100,000 range) during the past year.
In reality, spend can range from as low as $5,000 to as high as mid-six figure levels.
To get to the next level and move mobile from a test to a line item in advertising budgets, advertisers need a more rational and less fragmented buy/sell ecosystem, a level of standardization and greater visibility into metrics and measurement.
This is starting to happen in the mobile Web, but still has a long way to go to give advertisers comfort and proof points regarding realistic return expectations.
Associations including the Mobile Marketing Association (MMA) and the Interactive Advertising Bureau (IAB) are playing an important role in driving greater standardization and measurement.
We are also seeing more companies like AdMob starting to avail metrics/analytics to the marketplace.
Finally, we also expect the vendor/enabler marketplace to continue to rationalize over time, as companies acquire mobile specialists and build cross-media advertising capabilities, while others drop off the map.
Although a significant proportion of early market activity is being driven by mobile content companies such as Thumbplay, this does not mean that the market is entirely composed of a slew of small direct response marketers.
Like the early days in online advertising, large consumer brands have been testing mobile.
One vendor interviewed for this research rated mobile as more than half of the total market; and for some premier publishers, it may actually be much more than that.
Attracting brand dollars to mobile is important, given that it represents roughly 60 percent of total spending.
Brand dollars have been slow to move online in a big way, so providing meaningful proof points in mobile will be critical to fueling increased spending in this new medium.
Performance-based advertising constituted nearly 80 percent of mobile advertising inventory in 2008.
However, CPM-based advertising is driving the vast majority of revenue today. This can be attributed to wide pricing differentials on a CPM basis between the different ad buys.
In the future, reflecting the online environment, we assume that fill rates will balance and pricing across the two different ad buys will normalize.
For example, if CPC becomes too expensive, marketers will (as they do with other media) buy low-CPM inventory and manage performance themselves.
For branded publishers, the vast majority of mobile buys today are cross-media.
Mobile-only buys come after advertiser comfort levels are established and performance metrics are proven out.
This goes to the heart and soul of how mobile spending is happening: it still sits largely in advertisers’ test budgets.
Some publishers hold the view that mobile has moved to its own line item.
However, based upon where we are with mobile (overall spend), this year can best be described as another build year.
Publishers are looking to leverage their direct sales teams to sell mobile as part of a broader cross-media buy (with online and/or other traditional media properties).
Many of these same Tier 1 publishers are increasingly focused on building up direct mobile sales capabilities so that they can take direct control over their products and drive success in mobile.
Carriers are still extremely relevant in the ecosystem.
On-deck traffic still represents a significant proportion of overall traffic for many publishers (around 50 percent).
However, this is not necessarily translating into advertising revenue as only a couple of carriers have introduced advertising on-deck (Verizon and Sprint).
We expect that over the forecast period, more carrier inventory will be availed to advertisers, particularly between 2009 and 2010.
Adapted from the original and published with permission from Yankee Group.
For more information about “Harnessing the Mobile Internet,” please visit http://www.trendsmedia2.com/Harnessing. Mobile Marketer readers can receive a 20 percent discount by using the priority code HMIMMR5.
Eliot Weinman is president of the events and publishing division of Yankee Group, Westboro, MA. He is also founder and conference chair of 4G World, WiMAX World and Mobile Internet World, and editorial director of 4GTrends, WiMAX Trends and Mobile Internet Trends. Reach him at email@example.com.
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