Ovum Analysis --

Mobile Internet: which services and business models will prevail

Melbourne, 17 September 2008. Ovum's report on growing revenues from the mobile Internet is now published. The focus of much of our recent research has been on mobile broadband and fast mobile Internet access via laptop and a USB modem -or dongle, as they are known. This is of course at the core of mobile operator strategies right now as operators seek to drive revenue growth from flat-rate (or nearly flat-rate) access packages.

But the fate of the ISPs which took this approach for the Internet model several years earlier has triggered early warning signals for mobile operators, which are very aware that they need to find new revenue sources to future-proof their businesses once access becomes commoditised. The report focuses on the segmentation of Internet-based content and services on the handset (via a cellular connection - essentially HSPA) and which business models will prevail.

Michele Mackenzie, Service Manager and Practice Leader, said “Operators don't have to be dumb pipes, unless they are stupid”. The big question is whether or not mobile operators will end up being commodity mobile broadband ISPs, the dreaded 'dumb pipes' scenario. “The short answer is that they do not have to and there are ways to avoid this”, said Mackenzie based in London.

Mobile operators have unique resources to draw on that fixed broadband ISPs of the time did not, namely in-depth information about their customers and unique network-based assets to leverage, such as location. Operators are in a position to be intelligent facilitators, or 'smart pipes' as it is often called, meaning they can act as a platform and channel in the value chain for supporting third-party content and other services while still maintaining a position as a core provider of anywhere broadband access and key communications services. This is not such a terrible place to be.

Championing communications services may strike many operators as a retrograde, back-to-basics strategy, but we think there is merit in this. “I also think there is a lot of potential in utility type services that enhance the core proposition or add value in other ways besides direct revenue terms. An example here could be applications that enable people to manage their contacts and digital identity better in an environment where these are proliferating, driven by factors like social networking”, added Michele Mackenzie.

Where it gets a lot more challenging is around content services, which have in our view proved a misplaced holy grail for most operators. They need to take a long, hard look at how they support content services going forward. It is not a case of turning their back on content services like mobile TV, but being smarter about the approach taken, which can include all of the following:

offer their own paid-for content and services, but major on one or two services and take a more targeted approach
offer their own and third-party content on an ad-supported basis where the consumer receives advertising messaging in return for free or subsidised content provide access to free Internet-based content. The operator would not benefit from revenues from the content itself but would drive usage and hence access revenues.

These approaches are not mutually exclusive and operators will experiment, or at least to start with. Some might adopt all three approaches, but we think this is viable for very few - others might try and fail. Others will adopt one strategy, for example an ad-supported model for most content services, but even those that do invest heavily and become a content player will take a more focused and segmented approach going forward. They may focus on one particular service in house but take a cheaper route and outsource other services. PCCW, for example, is investing heavily in its TV portfolio.

“One of the challenges that operators face is that a lot of content which is paid for today will become ad supported going forward - or at least some components of it will”, advised Eden Zoller, Principal Analyst of Consumer Practice. For example, the business model for mobile TV can be a premium paid-for model or an ad-supported model - or, stretching this even further, a free user-generated model. “With regard to advertising-supported services, we envisage that many of today's paid-for content services will become ad supported”.

“However, we do not believe that the mobile Internet model will go the same way as the fixed model and become wholly ad supported. There will continue to be a mix of paid-for and ad-supported content over mobile”, said Eden Zoller, based in London. This is largely because the economics over mobile do not stack up, with the CPM rate generally insufficient to cover mobile network and delivery costs. These are typically higher than fixed network costs. In addition, not all operators will be successful in gaining a share of the advertising pot. They are, after all, competing with a large number of other players such as broadcasters, Internet players and traditional media players.

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