Global operator revenue from mobile digital content was estimated to be US$89 billion in 2006, and is forecast to exceed US$150 billion in 2011, according to industry analysts Informa Telecoms & Media¹. There are a number of reasons for this trend, including:

• Operators deploying alternative network technologies to boost data services and offset the decline in fixed-voice revenues
• The proliferation of multi-function devices and content distribution platforms becoming cheaper and more versatile
• A changing competitive landscape with new, non-traditional market entrants
• Consumers demanding greater choice and flexibility over their media experience
• Major brands shifting their media and advertising online to target customers in innovative new ways

High growth in digital content offers substantial opportunities for wireless communications service providers to expand revenues. With convergence reshaping the traditional telecom, media and network boundaries, Mobile Network Operators (MNOs) can expand their reach to include the types of media and content services not previously available to the wireless environment. Clearly many MNOs also need to upgrade their networks and technology platforms to compete in a world of new business models. But, equally important, they must deliver more value beyond access and enter into content partnerships in order to gain a sizeable share of this exciting new market. This includes addressing Mobile Virtual Network Operators (MVNOs) as a major strategic and commercial channel opportunity; considering the most appropriate forms of commercial arrangement, price planning, definition of services; and development of the partnership model.

Pressures of a highly competitive reseller market

The challenge for many MVNO’s is to extend their offer from being simply low-overhead resellers of voice minutes and messaging (SMS) services. They currently might leverage a strong brand and customer base and extend their reach through lower cost, prepay plans. Some own the retail elements of tariff development, subscriber management, billing and SIM branding but have not created significant traction in their markets to make any investment in their own network elements sufficiently attractive. The MVNO model has enabled host operators to develop new retail and marketing channels and to expand their assets to more users beyond their core customer base. The model also has enabled MVNOs to differentiate against the core business competition and improve upon existing customer communication channels. One of the most successful MVNO’s to date is Virgin Mobile in the U.K. which launched its operations in 1999, using T-Mobile's network. Within a year of launch Virgin had over 500,000 customers, exploiting the strength of the Virgin brand and a distribution network of approximately 5,000 retail outlets. Today they have more than 4 million customers.However, Virgin Mobile is an exception and recent press reports have focused more on MVNO casualties (e.g. Amp’d Mobile and ESPN in the U.S). It is becoming very difficult to offer compelling and profitable MVNO Voice/SMS plans in the highly competitive reseller market where margins are modest and start-up costs can be punitive, depending on the model which is adopted. Today MVNOs have a difficult time building customer bases in a context of discounted voice services, increased price erosion and decreasing ARPU. In addition, they are at the mercy of the host operator, especially in markets that have a high mobile penetration rate (according to a report by Analysys Research, ‘The Western European Mobile Market: trends and forecasts 2005–2010’, active mobile penetration already exceeds 100% in several Western European countries).

Innovative Business Models are Reshaping the Communications Sector

Traditional business relationships are rapidly changing and network ownership and technology leadership are no longer pre-requisites to a successful business model. This opens opportunities to a new breed of operators. The telecom industry is evolving from vertically integrated communications services, provided by fixed-network and wireless operators, to a model based upon flexible applications delivered across a converged backbone network, with multiple access options. Customers are offered an increasing choice of ways to communicate and get entertainment services (PDA, Voice portals, PC to Phone, IP Phones, Video telephony…), this is causing a value shift, from emphasis on the network as being the service, to applications that enable service differentiation. MNOs must now address strategies for the new digital content value chain as well as embracing the opportunities and understanding the potential threats associated with MVNO relationships. Specifically they must:

• Develop stronger relationships with TV broadcasters, content providers, content aggregators, advertising companies & copyright institutions
• Prepare infrastructure for the development, delivery and billing of next-generation convergent services
• Leverage a common IP backbone with wireline and wireless access for cost efficiencies and seamless service provision
• Organise operations around customer segments, increase responsiveness and innovate with media-rich value propositions
• Possibly even relinquish some control over the customer relationship in key segments by acting as a connectivity provider

The potential of new types of MVNOs to drive innovation

A new bread of MVNOs is entering the market. These include record labels, TV channels, radio stations, and content providers. For example MySpace has launched its mobile service through Helio, an MVNO founded by SK Telecom and EarthLink. There are constant rumours that Google may be launching its own branded mobile network. These MVNOs are able to differentiate themselves from the competition through their content offerings and are often the owners or producers of the content itself. Some will act as integrated media service providers, others will specialise as access providers, while the rest will search for success by virtue of their direct relationship with their customers. Most of these new MVNOs are looking to extend the digital service experience beyond simple derivatives (Ringtones; Ring-back tones; Short film clips for mobile TV; Customised voicemail greetings; Wallpaper etc) and expand into more advanced data services and new markets which will enable higher average revenue per user (An example is the mobile games segment – worldwide sales are projected to rise from almost US$2 billion at the end of 2006, excluding associated data charges, to US$3.4 billion by 2011, yielding CAGR of 11% - according to industry analysts Strategy Analytics³.)

Extending the digital content experience heightens revenue hopes

To succeed in this dynamic environment MNOs can decide either to try and directly control the relevant reseller channels themselves by subsidising services, offering new handsets, differentiating their pricing plans and owning their own retail outlets, or they can actively co-operate with MVNO partners to extend their channels. An obvious advantage associated with direct channel ownership is that MNOs can control more of what is delivered to the handset. This will become an increasingly important element in the creation and supply of content and advertising revenues (Internet advertising revenues reached a new record of US$4.9 billion for the first quarter of 2007 according to a recent announcement from The Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers LLP (PwC).

While MNO strategies might focus on new digital content delivery, MVNO service portfolios for the consumer segment are also moving beyond simple voice and data connectivity to value added applications that deliver a multi-service environment, including:

• Collaboration (integrated messaging, and conferencing services)
• Information (news, travel, home monitoring, child protection, e-health)
• Entertainment (music, gaming, self-developed content)

An example of this is Disney Mobile, which targets families as well as Disney afficionados, and enables adult subscribers to stay in control of their childrens wireless spending, locate their child’s phone using GPS technology and even schedule when their child’s Disney Mobile can be used. The service also offers a range of targeted applications, such as Radio Disney, Trivial Pursuit® Disney Mobile Edition and Vault Disney.

For the enterprise segment, operators’ business portfolios are focusing on enhancing user productivity, including:

• Personal efficiency (unified messaging, mobility, convergence)
• Group efficiency (collaboration, presence, instant messaging)
• Organisational efficiency (application sharing, multi-media conferencing)

The corporate as well as the small & medium enterprise (SME) segments have their share of specialist resellers and service providers. These service providers can extend the reach of the MNO offering by providing services which are more segment specific. This extension is particularly useful in the case of the SME and small office/home office (SOHO) communities.

The technology is available but a compelling business case is necessary

Technology advancements for the delivery of digital content service are enabling operators to create and extend the online digital content experience in the home, at work or on the move, from any device and across any network. These advancements include:

• Substantial investments in transmission technology (3G, EDGE and DVB-H etc.,) helping operators to make the technology transition and realise opportunities for mobile content
• Low cost femtocells and WiFi/High Speed Packet Access (HSPA) routers becoming viable alternatives to VoIP over WiFi for the provision of home entertainment services.
• The advent of IP Multimedia Subsystem (IMS) platforms enabling subscribers to access a greater range of multi-media services (Worldwide revenue from IMS core equipment and system integration will grow strongly, to US$6.5 billion in 2010, according to analysts Gartner Dataquest³.
• Prices of multi-function 3G handsets are becoming attractive to a wider range of users and are predicted to dip below US$90 this year according to inCode⁴
• Declining cost of software, storage and content creation platforms

However, whatever the role telecom operators play in the digital content value chain (transportation, aggregation and packaging, online content distribution, portal and search provision, etc.) it is unlikely they will possess all the skills required to become fully integrated digital content providers. Few telecom operators have sufficient presence and experience, or established relationships with other players in the media chain, to fully capitalise on content revenues. With the move to IP enabled communications, power is shifting to those companies that can focus on the consumer experience and specialise in segments where they can achieve a strong market position, owing to specific knowledge about segment requirements and brand reputation. In the short term, content producers are likely to capture a larger share of overall content revenues than communications service providers. MNO’s and MVNO’s are differently positioned to capitalise on the new competitive and technological realities of the digital content market. MVNOs have the ability to exploit technology and the commercial models this technology presents, to participate in a new wave of MVNO opportunities.

To realise these new opportunities MVNO’s must:

• Seek out new relationships and create more open and integrated content policies
• Offer the innovative digital content that consumers want and are are willing to pay for
• Focus on customer lifecycle management techniques by improving the way attitudinal, behavioural and competitive data is collected, organised and acted upon
• Monitor performance not only in traditional metrics such as Average Revenue Per User (ARPU), Average Margin Per User (AMPU) or Cash Cost per User (CCPU) but also in new performance indicators such as share of voice and gross rating points, as well as ‘Customer Experience Management’ (CEM)
• Establish an effective organisation for reducing the cost of new product development processes and shortening product life cycles
• Manage complex product pricing and cost interrelationships (e.g. from product-line and optional-feature pricing to two-part pricing and product-bundling)
• Invest in next-generation BSS/OSS to help automate the management of complex customer relationships and revenue opportunities, including sophisticated payment methods, delivery options and management of all the parties involved in the service and content delivery chain

To sum up, digital content represents the key opportunity for revenue growth in the telecoms market, especially in the mobile sector and operators of all types, in almost all global markets, have their eyes on digital content. Whether they are mobile operators, squeezed by falling ARPUs in their developed markets, or PTTs facing declining voice revenues, revenue from content forms a significant part of their forward strategy. All players need to adapt quickly to changes in the overall commercial and technical environment and recognize that holding on to legacy business practices and operational silos or complex technical infrastructures can be a false economy that will impede growth and reduce responsiveness. Globalization, new technology advancements, and innovative business models has led to the creation of new markets, customers and leaner MVNO relationships, and in a competitive economy, all operators (no matter how big or small) need to be able to take advantage of opportunities that arise – before their competitors do.

Author: Simon Dadswell, Advanced Solutions Marketing Manager, Intec.

¹ Informa Telecoms & Media. “Content Market Opportunity Study”. May 2007
² Strategy Analytics. “Mobile Gaming Market Update”. Author: Nitesh Patel. 03 July 2007
³ Gartner Dataquest. “Forecast: IP Multimedia Subsystem”, Worldwide, 2006-2010. 23 August 2006
⁴ inCode Telecom Group. Article: “Top 10 Global Wireless Predictions for 2007”. 26 January 2007