Research Notes

A Premium Nightmare

a Critical look at the US Mobile VAS-Industry

The United States is a remarkable country. Still seen by many as the land of opportunities and a symbol of freedom. In other words: The land of the entrepreneurial spirit. A place where a single individual, with enough vision and will, can make it big. Not just in the States, but in the world. Just look at Bill Gates and Microsoft.The American Dream is a dream shared by many in the Premium VAS industry. Some have already realized that dream. Just look at Jamba, which was sold to VeriSign in 2004 for 273 mill. US dollars.At Strand Consult we have closely followed developments in the US market for Premium VAS. When we look back at our expectations for the US market and compare those, to the market we see today, we are more than a bit disappointed. The American dream has turned out to be something of a nightmare for many looking to create a successful Premium VAS business. The US continues to be a remarkable country. Now also in a very un-American way.

The historical development of VAS
Premium VAS was first seen in Norway in 1999 with the introduction of Premium SMS and the use of Common Short Code across mobile operators. This business model was highly successful and has been copied by mobile operators across the globe.The ‘Open Garden’ strategy which is the very foundation of this success, has spawned an industry where a number of players together has designed a value-chain, which ties mobile operators and their customers together with a billing system. At various links in this chain services are developed, aggregated and marketed. Using gateways these services are then distributed via operator networks to the end users.The development of this value-chain has revolutionized the market for Premium VAS – both in terms of quality and quantity. We are also seeing clear signs that the volume in both P2P, SMS, MMS and Voice-based traffic is being stimulated through the use of Premium VAS.A few years back the names on everybody’s lips were DoCoMo and I-Mode. But even though DoCoMo started offering Premium VAS 7 years ago, only 55% of  its customers have bought and paid for a Premium VAS using their mobile phone. Compare this to Norway and Denmark where 85% and 60% respectively have done the same after just 5 years with Premium VAS. In Europe as a whole the percentage of people, who have tried sending a SMS to a Short Code is between 40-50%.Japan showed the way, but it was in the European market that the business model for Premium VAS was perfected – to the benefit of both operators, their customers, aggregators, gateway operators and content providers. The Japanese model is NOT a win-win model. The European model is.When we look at the developing US market for Premium VAS, we see a process mirroring the Japanese. US operators have clearly not learned from the mistakes Japanese operators made. And they are not looking to learn from the European success either. This is a Premium nightmare; A loose-loose situation.

Open Garden vs. Walled Garden
There is no doubt that operators must and shall play a central role in the Premium VAS market. The only question is how operators can ensure their shareholders the best possible return on their investment – both in the short and the long term.In the days before the launch of 3G it was believed that mobile operators would develop into a kind of mobile media companies, who would distinguish themselves from each other on the type of services they offered their customers. It was the days when the Walled Garden strategy was dominant.When I gave a speech at the 1999 WAP Congress I was speaking to an audience of 140 mobile operators from across the globe. I spoke to them about what, in my view, it would take to make WAP as success. Top of my list was the need for operators to follow an Open Garden strategy and the willingness to share their revenue with content providers. Not one of the operators present at the Congress was willing to do so. That day I knew WAP was going to fail.Today the picture is very different. All of those operators who initially refused to share revenues with content providers have learned their lesson, and have all implemented revenue-sharing models.Though there are still operators who believe in the Walled Garden strategy. They believe a mobile operator can differentiate themselves from their competitors using ringing tones and screen logos. Those are the operators, who have not realized that the cost of voice and SMS traffic make up 90-95% of the customer’s phone bill and of course these services and their cost means everything when choosing operator.

The US seen though a European lens
What is it like being a content provider in the US market and how does end users experience it? Let me answer these question by comparing the conditions put on content providers by operators in Europe and the US.Most European countries have implemented a set of rules covering all operators. Also their exist rules governing how content providers may market and sell different mobile services. Those rules were formulated in dialogue between content providers, operators and consumer interest groups. Content providers clearly know the limits they must work within and they know the penalty for breaking them.In the US the picture is very different. Here mobile services are not viewed as generic and dynamic services like they are in Europe. Here they are seen in the same light as any other period specific marketing campaign or television series. The way American Idol is seen in television terms is how Premium VAS is understood in the European media landscape.When a US-based content provider has developed a service and is looking to have it approved for sale, the provider is looking at process that can take weeks and sometimes months. Many content providers that we have spoken to, have expressed the sense that operators view their services as a problem and not as an opportunity.If and when the service itself is approved, the related marketing material must equally be approved by all operators, and so the process starts all over again. Its a process worthy of North Korea or any other centralist country, and not of the US.

US operators are censor mobile services
In Europe, and within the framework of local rule and regulations, content providers are free to market services developed for the mobile market. However, push-based services, adult content and services relating to gambling are legally restricted in order to protect children and others who may be affected negatively by such services.In the US the rationale behind the restrictions on marketing and distribution is different. Apparently some ‘smart’ people with the mobile operators have heard that there is a huge market for certain types of mobile services and these smart people are looking to ensure a monopoly. Examples of this behavior a plenty. Just look at T-Mobil who will not allow downloads of Java-based games since they are looking to create a monopoly on such services. And the most obstinate of the US operators must be Verizon Wireless, who does not allow downloads of any kind, since they are looking to entirely secure this market for themselves. Consequently Verizon’s customers can not get access to popular ringing tones. And then there is Cingular Wireless, who does not allow binary downloads and who is very slow to respond on requests from content providers.This situation is causing severe restrictions in the development of the US market for Premium VAS. The potential is huge – the possibilities are currently few. Getting services approved is a slow process and truth is that content providers find better and greater opportunities in Europe.

Why does the US not learn from Europe?
Looking at the US market for Premium VAS, one is tempted to ask why US operators do not learn the European lesson. Strand Consult have published a number of reports where we have mapped in detail the dynamics of a successful Premium VAS market. We have shown both operators, content providers how to create the win-win situation needed to be successful in this market.Why has CTIA not been used as the platform for formulating a set of uniform rules governing the US market for Premium VAS? Such as set of rules would make it significantly easier for content providers to develop, market and sell mobile services. Why not combine the lessons learnt in Europe with the US entrepreneurial spirit to create the worlds largest market for mobile content? Why not let content providers help mobile operators in the development of a dynamic market for non-voice services?Operators who still think it is possible to distinguish themselves from the competition using Java-base games or ringing tones should think again. The Walled Garden strategy is not a strategy for survival in the market for mobile services. Its against innovation. Its a strategy based on the same philosophy that governed the old Soviet Union – and look what happened to it when the wall came down.

Winners and losers
So who are the winners and losers in the US market for Premium VAS? Lets start with the losers. The biggest of them all are the shareholders. The strategy pursued by US operators means that they must invest huge sums in platforms, services and the marketing of these. For most operators this means a negative return on their investment in VAS. Some may claim otherwise and they all turn out to be very selective in the costs they count in when evaluating the performance of their VAS business.The second biggest loser is the customers. The supply of mobile services is not base on demand, but on what operators consider is good for their business. That is what customers buy and pay for. Basic market logic has been suspended and the supply of services remain very limited. Just think what would happen to the market for newspapers, magazines, television, books, films etc. if the same logic was applied.Another group of losers are, of course, the content providers. Bureaucratic procedures, and downright censorship, enforced by operators pursuing a Walled Garden strategy creates a less than dynamic market with rising cost and falling creativity as its immediate consequence. Few of the innovative services that could help drive the market development never make it to the market.The winners are few can be divided into two groups: Those who are able to persuade operators to invest in their service platforms and who are somehow and mysteriously able to persuade operators to pay huge sums up-front. The second group is the consultants. Those like us at Strand Consult, who make a good living from going around the world giving workshops and speeches on how others are making it big with VAS.I am tempted to say ‘God Bless America’ and when he does, my only hope is, that some of that blessing will help give US content providers the strength needed to survive in a market that is currently enjoying the same level of freedom as the editor of a North Korean newspaper.

More information about this topic:

Understanding the SMS and MMS Service Market

Understanding the Mobile Application Service Market

The Korean Market for Mobile Services

Show me the money

How to make money on mobile services

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