July 20, 2007


By Lai Kok Fung, BuzzCity CEO

Take a look at the mobile internet today: the vast majority of content – say 80% - is fee-based (ring tones, games, even sports scores), the remaining 20% is available to users for free and is supported by advertising. By 2010 and possibly even as early at 2008, I expect this ratio will flip. Why?

Right now the main thing that’s stopping people from using the mobile internet is price. Data costs are artificially high because telecom carriers – who invested massive amounts of money to purchase 3G spectrums – are targeting the upper end of the market – yuppies with blackberries.

But now it is starting to become cheaper for consumers to get online using a mobile phone:

* In South Africa, Vodafone recently cut high speed data rates by up to 61%. Two years ago, mobile carriers charged 40 Rand (US$5.82) per megabyte. Today you can surf the internet with a 3G phone for just 19 cents (US$0.27). (source: Mobile Data Issues)

* In Australia, Hutchison announced a price cut this week to A$29 per GB (US$25)

* In Singapore, it used to cost 1 cent/KB. Now, M1 offers an unlimited usage package for S$22 (US$14) per month.

* In the UK, Vodafone, O2 and 3 all offer 3G internet access for a set monthly price.

These last two examples highlight an important shift in pricing models. Instead of charging per kilobyte or gigabyte, carriers are offering “all you can eat” packages that are more attractive to consumers. This transition mirrors a similar shift that took place a few years back in the internet space. AOL used to charge consumers based on how long they were connected. Today, such an approach is virtually unheard of. Instead, AOL’s consumers and other PC users purchase unlimited broadband packages.

New technologies – particularly WiMAX – will also drive down fees. WiMAX, a major competitor to 3G, is optimised for data services. Spint-Nextel just announced it will spend S$3billion on WiMAX technology to set up “last mile” connections in 35 US cities. In Nepal, WiMAX works better than 3G due to the country’s mountainous terrain. The government there is planning to release the WiMAX spectrum soon, but again don’t expect to see the sort of numbers that telcos paid for 3G in the late 90s. This is good news for consumers as lower bids will lead to cheaper telecom rates.

Access charges will drop to a level that creates huge demand for the mobile internet. We are already seeing this happen in places like Thailand and Brunei where data charges are now affordable for most blue collar workers. The types of mobile content available in these markets reflects the preferences of these new users. We’re seeing more lifestyle-oriented and user-generated content, as opposed to business applications like remote email, powerpoint and word that are popular with PMEBs.

As demand for mobile advertising inventory has risen dramatically in recent months, many companies can now afford to provide content for free. We are witnessing this trend ourselves at BuzzCity. Over the past three months, our ad revenue has nearly doubled every month.

With all these choices, users are becoming picky about what they purchase from their mobile operators. In some markets, the revenue operators receive for paid content is in danger of crumbling. The impact has reverberated alarmingly for content providers whose income depends on relationships with mobile operators. For example, Monstermob recently reported a massive loss of U$209M.

A handful of mobile operators have responded to this trend by becoming more xenophobic. They block access to free content that is deemed to be detrimental to their paid downloads and stubbornly defend this as “protecting the customers”. These operators should take note of a recent article by CNBC analyst Paul Kedrosky who writes “People hate their cell phone carriers. Hate, hate, hate, hate. The major cellular providers -- with their ham-handed “support” and fascist control of software that can run on phones directly – are right up there with the IRS in terms of inspiring your average mobile phone user’s disgust and loathing.” (see Paul's recent piece in the Wall Street Journal.)

I believe that a healthy mobile content industry based on paid and premium content can flourish if mobile operators stop behaving like paternalistic gatekeepers. Instead, they need to focus on providing transparent billing mechanisms that inspire user trust.

As we've seen with premium sports channels on cable TV or the online edition of the Wall Street Journal, consumers are willing pay for content when it is exclusive and competitively priced. Moreover, micro-billing by WAP or SMS can now make it easy for users to purchase this content.

Mobile operators, however, need to improve their billing platforms to prevent abuse by unscrupulous content providers and should soon phase out questionable subscription services. Recent introduction of Payforit in the United Kingdom is a very good step in this direction.

With unfettered consumer choice and transparent billing policies, both consumers and content providers will benefit. Mobile operators, of course, will also benefit from considerable commissions as they provide the billing service on behalf of content providers. I believe that a commission rate averaging between 20% to 30% of the retail price is reasonable. Although these rates may appear excessive compared to those charged by credit cards companies, I believe that it fairly reflects the ongoing investments the mobile operators need to make to provide this micro-billing service and leaves sufficient margins for all players in the value-chain to be viable.

Of course, I still expect that majority of mobile internet content to be ad-based in the next one to three years. The cost of accessing the mobile Internet will drop significantly whether the mobile operators like it or not. Advertising revenue will be seeking mobile Internet sites that provide compelling content that users want, enabling these sites to continue providing content for free. And if the right steps are taken, the mobile industry will have a healthy premium content segment too. This will be good for everybody.

Note: The inspiration for the photo at the top of this piece comes from Lee Dryburgh, who has posted a similar picture on his Flickr site.