Financing The Future: What’s Next In Mobile

During his tenure as Google’s CEO Eric Schmidt attended a private meeting in Davos with a group of senior telecom executives and tried to crack a joke. “Why don’t you make all of the investment and we will take all the profits,” quipped Schmidt, according to a story making the rounds in the tech industry. Nobody in the room laughed. His stab at humour hit too close to home.


The industry is still trying to figure out the business models that will support the building of the souped-up networks needed to bring very high speed broadband to everyone. Mobile broadband subscriptions are expected to hit the one billion mark in 2011 and top 3.8 billion by 2015, generating a fifty-fold increase in data traffic.Operators are worried that they will be stuck with the bill and, unless new business models are put in place, are not sure how they can justify the massive infrastructure investments needed to allow consumers to make video calls, stream music, watch movies and download and install applications on their phones.


Web companies are interested in exploring how the mobile operators might help them monetize or expand their services but are not ready to do revenue sharing deals and are resisting the notion of differentiated pricing for internet services.  The question is whether staid telecom companies and disruptive newcomers can team up in a way that would allow both sides to benefit financially.


 The fact that telecommunication industry executives are sharing the stage at the Mobile World Congress in Barcelona Feb. 14-17 with Google’s Schmidt, now the company’s executive chairman, and the entrepreneurs behind Twitter, Foursquare, Skype and Square, illustrates just how dramatically the sector is changing. 


 “The time when mobile operators could be gatekeepers and it was  impossible to bypass them is rapidly coming to an end,” says Alexander Isozimov, until recently the chairman of the GSMA, an industry association that represents over 800 of the world’s mobile operators, and the current chief of Vimpelcom, one of Russia’s three top mobile operators.  “If mobile operators partner just to avoid being bypassed we will be bypassed. We have to come up with a clear and unique value add and provide it in the most cost-efficient way, improving the financial return in the value chain,” he says.


If they don’t, the role of the mobile operators, once an abiding symbol of corporate might, will continue to shrink.


Bypass is already a reality. Consider a statement the former CEO of Vodafone, one of the world’s largest operators, made to the press on November 19, 2007: "The simple fact that we have the customer and billing relationship is a hugely powerful thing that nobody can take away from us."  Apple proved him wrong. . Citibank is projecting Apple’s App Store will bring in $2 billion in revenue in 2011,billing consumers directly and taking a hefty cut of all the apps it sells.


Then there is eBay mobile. The company has 30 million customers and racked up $2 billion in transactions over mobile phones last year, using Paypal, rather than the operators’ billing systems, as a payment mechanism. “To be honest we haven’t done a lot with carriers,” says Steve Yankovich, vice-president of eBay Mobile.


Google and Apple are grabbing significant revenues from mobile advertising, an area in which operators have had only limited success to date. And companies like Skype and Google, which grew by innovating on the edges of the telecom network, are now revolutionizing the network itself, grabbing voice traffic and causing revenues from that stream of core business to further plummet.


“Mobile operators used to be at the centre of the ecosystem,” says Thomas Husson, a Paris-based analyst at Forrester Research. “They were controlling the user experience and haven’t necessarily anticipated the tectonic shift.”


The whole concept of who supplies telecoms and communications is changing. Telephony and other communication services will increasingly be just another software application with no special relationship to device, platform or location, making it possible for a player like Facebook to offer mobile services.


 Analysts are projecting that Facebook – which now has more than 500 million users globally– will buy Skype in 2011and launch a calling service within its mobile applications.  The acquisition of Skype would provide Facebook with a huge group of users that complements its own. Functionality could easily be added to enable a small telephone symbol next to Facebook contacts that are online: all users would need to do is click to make a call. Initially the service is likely to be restricted to wifi connections but the potential for expansion is clear. “Operators will be powerless to stop this trend and they will see their revenue from roaming calls dip further,” predicts CCS Insight, a UK-based mobile consultancy.


There is still room, though, for the operators and the web players to come together so that everyone can make money, says Skype co-founder Niklas Zennstrom, who now heads up London-based venture capital firm Atomico. “I think that it is important that everyone understand that the mobile web is a symbiotic ecosystem where all the companies actually need to function together,” says Zennstrom, a speaker at this year’s Congress. “The operators need to deliver great services to drive broadband sales and the online companies need great networks to deliver their online services.”


Web players are open to collaboration. Foursquare, for example, sees partnering with operators to get its site promoted as a great way to widen its distribution. “As part of our business development we are lining up deals with different carriers from all over the world,” says Foursquare CEO Dennis Crowley, a speaker at the Mobile World Congress.


New Business Models


But other, deeper, types of collaboration bear exploring. “The big opportunity being missed by operators is payment,” says Zennstrom.  “It is not too late.” Some Web companies are interested in using not only operators’ knowledge about customers but also their ability to bill for services. The problem is that carriers are still looking for revenue sharing arrangements that give them hefty cuts of 30 percent or more, and that won’t fly, says Zennstrom. Operators can make good money on volume if  they agree to much lower rates.


Mobile operators can’t afford to take less than a 20 percent to 25 percent cut because the costs for operators of paying commissions to retailers for pre-paid customer recharges and other costs associated with billing are very high, says John Strand, founder of Copenhagen-based mobile consultancy Strand Consult. 


Expertise on micropayments gained from experience billing for premium sms services like downloadable ringtones could be used to help media companies monetize their content on tablet computers, says Strand. Today content companies pay Apple 30 percent to reach tens of millions of Apple devices while operators reach a potential customer base of 4.8 billion, he says.


Another model could open up business opportunities for a whole range of players while generating new sources of revenues for the operators. OpenAPI (short for application programming interfaces) is a GSMA-led industry initiative that would – for the first time – allow third parties to access multiple telco networks in order to develop services that take advantage of thenetworks’ built-in functionality and intelligence and use the operators’ billing systems to invoice the services. Such wholesale services create an entirely new revenue stream for operators, without the headache and expense of having to dream up, create and market new services.


Services envisioned include in-app billing, network-derived location and click-to-call conferencing that operate across multiple network operators.  For example, a Web developer could leverage presence and billing in the telco operators’ network to design a new service, like setting up a conference call between 10 mobile phones with a simple click, and that could be bundled with an online offering from a software-as-a-service vendor like  The operator would remain invisible but would earn revenue per transaction, explains Allen Snyder, chief executive of Aepona, a Belfast-based mobile cloud computing company that specializes in helping operators leverage the intelligence in their networks to create such wholesale services.


The first commercial OneAPI multi-network service has been launched in Canada, linking mobile networks run by TELUS, Bell Canada and Rogers Communications. The service is run by the GSMA on a platform provided by Aepona.


“The mobile operator’s strength is – and will continue to be – the combination of having a large customer base and a billing system,” says Danish mobile consultant Strand. “Combined with open APIs this will make mobile operators intelligent bit pipes.”


Dumb pipes or content kings?


Even if operators do nothing special, they would still be making buckets of money on the transport of traffic. If operators make $10 per month in ARPU (average revenue per user) and there are 4.6 billion mobile users worldwide, that works out to $46 billion a month. “There is nothing wrong with being a dumb pipe,” says Strand.


Some operators, such as Hutchison Whampoa’s 3 UK, have decided that they will not try to create their own content. Instead, it is thriving by embracing online players and differentiating on the quality of their network and customer service. It was the first operator to integrate VoIP operator Skype, for example, and ensured the success of the service by integrating it in a way that ensured it would work well for consumers.


3 UK is attracting clients by offering a better experience for consumers who want to use bandwidth-hogging services like video. “Our strategy is to make our pipe as smart as can be and then make sure people are using our pipe and access rather than anyone else’s,” says Charlotte Blanchard, 3 UK’s director of products and services.


But many operators have much grander ambitions.  They are not content to just leverage their plumbing and move digital bits through their pipes, they want to move into the media, banking and advertising businesses. So far bids to become media players have been spectacular, expensive failures. “We are talking about massive shareholder value destruction,” says Strand.


Industry efforts to emulate Apple’s success with its App Store have also flopped. Until now the mobile marketplace has been fragmented, in terms of both technology platforms and individual operators opening their own app stores. With the industry in a state of flux, developers have flocked to Apple's App Store, creating more than 300,000 applications while largely ignoring the rest.


At last year’s Mobile World Congress 24 operators – including China Mobile, Vodafone and the U.S.'s AT&T  formed an alliance to build an open platform that delivers applications to all mobile phone users. Operators in the alliance, blandly named the Wholesale Applications Community or WAC, set a goal of establishing a simple route to market for developers striving to deliver applications and services to a much wider possible base of customers.Telecom company executives and analysts say the results have been disappointing.


While it takes time for industry-wide initiatives to thrive, Rene Schuster, CEO of Telefónica O2 Germany, says he sees opportunities for individual operators in areas such as mobile security (data protection, virus protection), mobile money (both peer-to-peer and international remittances) and machine-to-machine communications (the so-called Internet of Things which will connect all devices and appliances to the internet).


Schuster acknowledges that in some cases it is smart to embrace disruptive players, pointing to Telefónica’s 2009 purchase of internet telephony company JaJah, in a $207 million all-cash deal, enabling it to expand its offers to include communications services to online customers.

And, Schuster says he believes that it is crucial that mobile operators work more closely with other types of internet players. “We have to find a way to get together from a transaction or quality of service point of view,” he says.

That will be tough. When it comes to revenue splits telecom operators still bat around figures ranging from 20 percent to 50 percent, while internet players are thinking single digits. And, the quality of service concept, which would introduce differentiated pricing for different services, is being resisted by companies like Google, which wants to prevent the operators from being allowed to prioritize their own services.

It is clear the two sides are still far apart. But the fact that they are mingling at the Mobile World Congress conference is a start. There is clearly a strong incentive for the operators to be receptive to new business models. Otherwise they may end up sharing not just the stage in Barcelona but a bigger share of their revenues.





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