Kate Bulkley, Media Analyst.

3G Mobile Phones: Mecca for content providers or dead end?

By Kate Bulkley

Financial Times

July 17, 2001

This is a nail-biting time for mobile phone companies that have bet on the future by spending billions of pounds for third-generation licences. Besides the fact that these new 3G networks won't be up and running for at least another 18 months, and will cost operators billions more to build, there are also big questions over how much revenue they will actually generate.

Will people pay for live sports scores and music video downloads? Will they subscribe to a dating service that could send them a text message if someone with a compatible personality profile is standing a few metres away? Will they pay for a service that can identify a song being played in a bar?

What is clear is that mobile operators' traditional business of packaging simple voice calls and messaging is not going to support investments in these new 3G networks. Schema, the consultancy, last week predicted that the average revenue of Dollars 450 generated last year from a mobile subscriber in Europe will fall sharply for the next two to three years, under pressure both from falling prices for calls and continuing handset subsidies.

Revenues are only predicted to rise in late 2003 or early 2004, fuelled by mobile applications for businesses such as unified messaging and by premium services for consumers, such as location-sensitive match-making. In fact, Schema believes that offering compelling consumer services, particularly mobile multimedia and entertainment, will be crucial.

"In mobile, business applications will only go some way to getting operators' revenues back up (to the Dollars 450 per subscriber per year level)," says Robin Bosworth, a director at Schema. "But if operators don't have a consumer strategy in data services then the 3G models will fall over."

Given this scenario, mobile operators need to look at deals with everyone who has a service that can potentially generate new revenues. But Schema and entrepreneurs say it's a difficult battle.

"The telecoms industry is not used to the content industry," says Bosworth. "The mobile operators want 40-60 per cent of the revenue from a service, but the content providers say, 'no way - we're taking all the risk'. As a result we're seeing a lot of the discussions break down."

Ian Germer, director of product strategy and management at Vodafone argues this is unfair. He won't reveal commercial terms, but he says that the revenue splits are based on what Vodafone provides to make the services work, from simple carriage on their network to navigation and billing. However, the operators' urge to extract as much revenue as possible from content providers could backfire if, by so doing, they stunt the growth of the very services they need both to generate traffic on their networks and create new revenue streams.

There is a struggle going on between the operators, who have the networks and the subscribers, and the ideas-rich, but generally cash-strapped and, sometimes, business-model poor entrepreneurs.

Germer says his team at Vodafone receives an average of one call or e-mail an hour from an entrepreneur, but that many of these "services" are little more than a piece of technology. "I wish in some areas we could bring more deals to market," says Germer. "I'm not trying to bottleneck anything but we're busy people. So the ideas that are more fully formed are the ones that get the attention."

This is little comfort to the entrepreneurs, such as start-up music identification company Shazam! "It was definitely very hard to get meetings at the beginning with mobile operators because there is so much noise," says Chris Barton, Shazam!'s 31-year-old chief executive. It took Barton two months to get his first Vodafone meeting. Vodafone's Germer says Shazam! "is not quite ready to go to market". Still, he and his opposite number at Orange, Ian Henderson, both think Shazam! has potential. Using patent-pending technology, Shazam! turns your mobile phone into a listening device that can identify any song from any source, be it a jukebox, the radio or a DJ. The premium-rate service works in noisy environments such as clubs and the artist and song information is delivered to your phone as a text message.

Good technology can grab an operator's attention, but because these are new business models, the relationships between operators and entrepreneurs are complex and shifting. For example, Shazam! knows that its technology will not take off until it can seal a crucial and potentially expensive deal to get access to a digital music library.

Another clear area of conflict between operators and new services is over brand. "The mobile operators are used to having very powerful brands and so they are not sure how much to open up their platforms," says Schema's Bosworth. "This is effectively constraining the market."

Barton had a gut feeling that word-of-mouth transmission of the name Shazam! would help pull in users, so he has shied away from exclusive distribution deals or agreeing to use different names on different networks. He says this instinct was confirmed by a meeting with Hans Snook, ex-Orange CEO, who told him a service such as Shazam! needed a strong, cross-platform brand, especially if it is to take off among clubbers, a key target market.

Clearly a lot of thinking is going on about how best to cut deals, both for operators and content providers. If mobile operators insist on exclusivity, big slices of revenue and own-label brands for new services such as Shazam!, they could risk stifling overall market growth. For Shazam!, which is on the cusp of taking a "cool" technology and adding the other components such as a digital music archive that would turn it into a real service, it's all about getting the right distribution and revenue-sharing deals.

"It's in everyone's interest to sort these relationships out," says Schema's Bosworth.

"And given the current economic climate, they'll sort it out. But some may sort it out faster and better than others, which is why the pressure is on."

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