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October 24, 2005
Lower Your Garden’s Walls, Lower Your ARPU
Lower ARPU aside, the industry is still growing. But there is one trend that could kill the ARPU driver with the greatest potential.
Total Telecom reported last week that Global mobile ARPU fell 13% in the second quarter as compared to the same quarter last year.
Eastern Europe saw a 27% decline and Asia saw a decline of 18%. The U.S. saw a comparatively smaller decline at 2%.
The reasons for declining ARPU are generally understood, but there is some conjecture about the future. Here, let me conject...
Competition Drives Pricing Pressure
Open any Sunday paper and you’ll see a full-page ad for one of the top three U.S. carriers revealing their apparent race to the pricing bottom in order to attract more subscribers. The offer is invariably increasingly x000 more minutes for a decreasing $x9.99 per month. So while the average monthly bill has decreased almost by half in the past ten years, the total number of subscribers has increased more than 10x, which has driven revenue over 60x to the $100 billion U.S. wireless industry today.
Apparently, there is massive demand for communication. Good to know. Charts about dollars that go up and to the right always look pretty healthy, so who really cares about Average Revenue Per User when it is apparently being offset by volume? There are some reasons to be concerned:
The cellular telecommunications industry is competing with FREE
VoIP is one of the most transformative technologies of the decade, and possibly the century. What happens when free or nearly free IP-based telephony goes mobile? Rather than employ a metered or semi-metered model, the communication provider of the future is the ISP, providing access to data via tools that consumers will find themselves (like a Skype client for their multi-air interface handset.) Even then, people will only pay for QOS, which is the reason I maintain my T-Mobile Hot Spot account despite the fact that I am increasingly finding free though sometimes unreliable connectivity in places I didn’t expect to find it before. I should note that QOS can still be made available for free, since the cost of offering it in a limited geographical area is simple and cost-effective especially if your primary business model is to get people to sit in your store and buy stuff. Now when I absolutely have to call Europe, I go to a Panera Bread Mecca and do it for free where I know the signal will be strong and uninterrupted. (I also love to spend money there to reward them for their apparent vision of the “Atkins Backlash” driving millions of carb-starved people to the yeasty, floury comfort that only freshly-baked bread can deliver.)
If you are saying to yourself, “That will never happen,” think about some other industries that have found themselves competing with free to their great detriment. The music industry ignored the MP3 format and the internet to their great detriment and they will never recover. True, it didn’t completely kill their business, but it did unseat them as the only source of content. Once they lost control, it was (and continues to be) a downhill slide from there.
Panera won’t put Cingular out of business, but isn’t Google planning to wire the country with free wifi? I predict a coming chilling effect on the cellular telecommunications industry. After all, I am not using my cell phone anymore to call Europe. That is a contributing factor to declining ARPU, and I wonder how big that trend is. Still, this is a legitimate business issue grounded mainly in free market competition.
The cellular telecommunications industry is competing with other verticalized communication services
I noted recently that I have:
- This blog,
- A personal blog,
- A channel on Rabble,
- A travel blog,
- A Skype ID,
- 2 primary AIM handles,
- 1 primary business email address,
- 2 primary personal email addresses,
- A gmail account for large files,
- 5 Yahoo email accounts, (1 spam catcher, 1 Yahoo ID and 3 for which I have forgotten the password)
- A profile on Evite that I use from time to time for that kind of stuff,
- A profile on Match.com, (purely for research purposes)
- A WAP site,
- A fairly active and useful profile on LinkedIn,
- 3 mobile phones, (one unlocked which I use primarily for voice and when I travel abroad, one test phone and my Nokia N90)
- 2 laptops,
- and a SideKick.
Think about your own list and it probably won’t be much different from mine. You have multiple emails, IM handles and clients, two-way publishing points, etc. I am not unlike many people who are verticalizing their communication because there isn’t one perfect tool that does it all. In 1999, I had 2 email addresses and a Nokia 6190. That was old skool.
The net result is that my time and attention is finite, but I am communicating more in general. Therefore, the biggest opportunity to the cellular telecommunications industry is to offer the kinds of applications that verticalize my communication. Note that only one of the services I listed is voice-centric. If I am using my various communication tools more, and none of them are available to me via my primary mobile device, this will drive ARPU down since the percentage of my consumer wallet allocated to communication that intersects my mobile device is surprisingly small. They’ve got me for voice and SMS for sure, but as my communication options increase, the total amount of time spent on cellular voice is simply decreasing. I personally think the biggest opportunity for network operators to grow data ARPU is to focus on communication-based applications since it is in line with their core offering, but of course I have a bias. This is also a function of free market forces, and if carriers choose not to provision the kinds of communication applications that people are using, that is their business, and a perfectly legitimate reason for decreasing ARPU.
The cellular telecommunications industry is selling data
In and of itself, selling data and not just voice is generally seen as a step in the right direction. I am obviously in favor of this trend. I have made the argument before that in some cases it might cannibalize other revenue, but even that is not such a big deal since the total sale of data (primarily driven by high-margin SMS) is increasing. The argument I have made before is that when you download a game and pay a one-time fee, the marginal value to the carrier is very high, but then you use the game offline potentially for months or years without utilizing the network. It sounds like a favorable “gym membership” business model at first (people pay but don’t use it) but when you consider that your offline game exists to fill your time when you are sitting in the airport, the opportunity cost of selling the game may be the value of the many SMS you might have sent instead if you didn’t have the game. It is a difficult argument to back up, and I have never come across a study on the topic, so if you know of one please let me know.
No matter. If it is even anecdotally true it is a legitimate contributing factor to declining ARPU, but not a big deal given the current volume and besides, the truly exciting games are network-based and I think that is the future of mobile gaming.
There are also plenty of other reasons for declining ARPU, and I think that in addition to the ones I mentioned, they are simply the result of healthy competition, market pressures and enabling technology which are all good for the consumer, particularly if the industry as a whole is growing.
BUT, there is one possible reason for declining ARPU I want to discuss that truly concerns me.
The cellular telecommunications industry is selling data off-deck
This is the ARPU driver with the greatest potential, and it is already in jeopardy.
Can the effect of Jamba be measured? What does this mean for the future of data ARPU:
Lawsuit accuses Jamba of making misleading ringtone offer
Jamster slammed for mobile selling practices
Verisign CEO Stratton Sclavos pre-announced that it would miss its 3rd-quarter consensus estimates due to weakness in its wireless business, citing among other things “new advertising guidelines and restrictions in several key European markets.”
It is possible that the translation of that last part might go something like:
“Our somewhat aggressive business model that pushes content to people who in some cases did not know they were opting to receive what we push them had to be, ahem, revisited.”
I am not indicting Verisign, though there does seem to be some evidence to support the possibility that their business practices are misleading.
There are others. Try searching for “SMS.ac scam” and you’ll get an interesting mix of results mostly focusing on misleading business practices.
Here is the problem:
Wireless carriers operate in a highly regulated industry and are fearful of offering content that may be objectionable, and rightfully so. The solution is to offer billing services to various 3rd-party content providers and/or allowing their users to get to content they are not provisioning but are nonetheless profiting from. Such arms-length mechanisms as Premium SMS and BOBO arrangements are a perfectly reasonable way for carriers to avoid scrutiny, operate more like ISPs when it comes to data services and provide their subscribers the content they obviously want without having to actually provision it themselves. I personally think the carriers should be fully entitled to profit from the content we all know people want with impunity but unfortunately they have to work within the rules of doing business set forth by the FCC. With off-deck marketing, a wireless carrier can and should claim ignorance to the content of the transactions passing through their system, and as an added benefit they get to leverage the marketing power of their various unknown partners. Content outside of their walled garden is not their responsibility to police. I think it makes perfect sense.
The unfortunate part is this: The only business model that can be promoted in the environment I describe is “Push.” When you push someone something, you make your cut on the PSMS. Profit-minded capitalists are therefore incented to push as many PSMSs as they can, and that’s where business models get scammy. You see businesses that dupe you into a subscription when you were absolutely sure you only authorized a one-time transaction. Or you see businesses pushing you content you didn’t want and cannot opt out of. It’s like once they have your phone number and any kind of authorization (or not) they fire a very costly spam cannon at you. Then they amplify their business model by expanding their reach through channels like MTV and Nickelodeon asking you to text 12345 to short code 45678 to receive your free blah blah blah. Then it goes downhill from there.
The problem with push is that it is separated by a very fine line from spam. Email spam is annoying enough, but in the mobile space it is also very costly, and it would be impossible to do if the carriers weren’t lowering the walls on their walled gardens. I do not blame them at all, but it bears mentioning that the most important asset they have is the billing relationship with their subscribers. A near-frictionless billing mechanism like PSMS, if immediately and vigorously abused, will end up hurting consumers, the wireless carriers and all content providers (legitimate and otherwise.)
How many customers does a wireless carrier lose due to an abusive 3rd-party content provider? If the answer is one, it is too many.
We are about to see the same thing that happened with premium-rate landline billing. Tell me honestly – are you not afraid to dial a 900 number? You are almost guaranteed to see a $50 item on your phone bill if you dare dial one. It got so bad that the FTC had to step in and create a rule stating that consumers have to be able to see upfront what they are going to pay, what they get in return and what happens in a billing dispute.
I’ll bet you these are the basic dimensions you will find in the complaint filed against Jamster.
So let’s say the FTC steps in and makes a rule about premium rate billing on mobile phones. Would it matter? Did it matter for 900 numbers? No – if the FTC steps in, that means it is such a problem that it is far too late and we will never get the shit back in the horse. People will simply never send anything to a short code ever again. And there goes your hockey-stick data revenue.
This should scare the shit out of everyone in our industry given the number of people who believe data ARPU is going to replace declining voice ARPU. For that to be true, we must recognize as an industry that consumers respond to fair value for their dollar.
A carrier's storefront is only so big, and it is difficult to monetize effectively. Off-deck marketing, leveraging existing audiences and promotional dollars, is the only path to increased data ARPU. Teaching consumers now that it is easy to get scammed on their cell phones by off-deck marketers is not the way to ensure the future data revenue streams that are going to be critically important when organic subscriber growth can no longer drive topline revenue in saturated markets.
So, a dilemma. You can ensure long-term customer satisfaction and keep your gardens walled and offer only vetted content and services that under your watchful eye will not abuse your customers, or you can take the short-term revenue gain now and manage by exception hoping that most of the 3rd-party services will be legitimate. It is a tough decision to make and I have not seen measurable evidence of the fallout from the handful of scam-based business models in the mobile space, but as the mobile phone number becomes the singlemost important piece of personal information it would be wise to offer consumers some level of protection lest they find their own way to do so.
Posted by Shawn Conahan at October 24, 2005 07:38 PM
Comments
Do walled gardens come at the expense of innovation, fueled by the need to keep prices high and costs low in a more regulated market? Given the intense competition from open systems like skype etc, retreating into even more of a closed system seems like a formula for extinction. You seemed to address this issue in the first few paragraphs, but it is not clear to me whether you are advocating an open or closed strategy.
Posted by: Dorrian Porter at October 25, 2005 09:37 AM
Let me be clear: I am in favor of open access, but would prefer that the carriers (who have the most to lose when consumers get scammed) employ a vetting process on the front end and provide a path for recourse on the back end. It is the regulation by the FCC that forces the arms-length relationship that many of the carriers have with 3rd-party content providers. This essentially removes the carriers from liability (which they shouldn't have in the first place) but also makes it more difficult for them to regulate abuse. When their billing is provided by various arbitrators in various countries, there is no way to chase down a company abusing their infrastructure.
I think walled gardens are a natural extension of the multibillion dollar investments made by the network operators. It is their right to protect their investment. Walled gardens for the carriers are not a formula for extinction any more than limiting the number of products that are on the shelves is a formula for extinction of WALMART. There is a serious vetting process at WALMART that not only ensures competitive pricing, but also provides the consumer with the best possible value available at ANY store.
It comes down to shelf space: A network operator can provision 1,000,000 applications through a vetting process that gives them the ability to pull the plug on an abusive content provider immediately, just like WALMART pulls a product off the shelf that is harmful to its customers.
Can you imagine buying something from WALMART that cost $2, then a week later WALMART was sending you 3 of the same products every day and there was no way to stop it? Then when you called WALMART, they told you it wasn't them sending you product and charging your credit card and that there was nothing they could do about it?
THAT is the formula for extinction for network operators.
Posted by: Shawn Conahan at October 25, 2005 11:03 AM
DoCoMo in Japan is an interesting case study in walled plus open. Their I-Mode service is still the most successful wireless data offering I'm aware of. They support both vetted 3rd parties and any other 3rd party who wants to make an offer. The difference is only vetted 3rd parties get to leverage DoCoMo's billing which in turn offers a small number of price points (no $50 connections).
Within the first 30 months of launching the program they had 7K vetted sites and 40K-50K other sites participating -- and that was in 2002. I'm not up-to-date, but the other figure that sticks in my mind is ~60%-70% of the traffic is to vetted sites, i.e. a third of the traffic goes to other sites that are either free or have alternative billing arrangments.
Posted by: Brough Turner at October 25, 2005 12:09 PM
The Walmart analogy sounds good, but it also rests on a tenuous assumption that innovation operates similarly for technology as it does for physical goods. I think it is safe to conclude that the very existence of a controlled environment will stifle innovation. The question then becomes whether the trade off is worth it. In the online world, AOL is being forced to change or die, despite its claims (probably true) that it was better at preventing spam and fraud in its closed system.
Posted by: Dorrian at October 26, 2005 10:09 AM
Great point in general, but I think you are confusing where I am advocating placing control, which is in the distribution channel.
First of all, while your position is sound and it is hard to argue with the notion that freedom begets innovation, I don't buy the argument that a controlled environment necessarily stifles innovation. Such controlled environments have led to such innovations as nuclear energy, space travel and major medical breakthroughs. So, no, it is not safe to conclude that a controlled environment will stifle innovation...all the time.
No matter though, because the innovation to which we are both referring takes place well outside the controlled environment which you are arguing should not exist, namely the network operators' walled gardens.
I think you have misunderstood the meaning of this post, which is to point out that there is no lack of innovation in the mobile technology space (a few examples of which I mentioned) and it is good for consumers up to the point that that innovation leads to abusive business practices BECAUSE OF a distribution environment that has no controls. When relatively open access to a billing facility starts to hurt the customers of the companies that provide the distribution channel, those companies should consider placing tighter controls on their BILLING and DISTRIBUTION.
Posted by: Shawn Conahan at October 26, 2005 10:31 AM