Research Notes

Pricing of mobile content

lower prices in Korea has kick-started mobile services market
In Europe, the mobile users have been paying for mobile services from day one, there has never been any free mobile content. But even so, many in the business have been surprised that the mobile consumers have been willing to pay over 1$ pr. go, for premium content like a ringtone or logo and the premium mobile services market is still growing steadily.

In Korea, the mobile operators started up with a different strategy for their mobile services rollout. What they basically wanted to achieve was high volume of data traffic and to be able to differentiate themselves from the other mobile operators.

The basic elements in their mobile services and content strategy was to:

·Offer very many services – at little or no extra cost other than traffic fee
·Content and services were packaged in walled garden portals
·Mobile operators helped content providers in other ways – to ensure content

The main reason for offering mobile content and services at a lower cost, was to kick start their 2.5 G rollout and give the mobile users an incentive to go out and buy new 2.5G mobile phones and start trying the new data services straight away.

This part of their strategy has been an unprecedented success. In the first year from the Korean 2.5G launch, 25% of the 36 million mobile subscribers went out and bought new 2.5G mobile phones – and around 85% of the new 2.5G customers use data services regularly. And in case you didn’t know – in Korea it is forbidden to subsidise mobile phones.

However, there has been a downside to the strategy – a downside that the Korean mobile operators have become aware of and are taking steps to amend.

The regulative authorities in Korea have ruled that the mobile operators can only take 10% of the revenue from premium priced content – giving 90% to the content owners – however the operators do not have to share the data traffic revenue that is added to each premium price service or content.

In connection with their strategy, this has meant that it was simply not in the interests of the mobile operators that the actual cost of content was very high, as long as they could keep the revenue from the data traffic. In effect, the ruling has just meant that the content providers were getting 90% of very little and therefore has not had the intended effect of helping content providers make money on mobile services.

The highlights of the mobile operators strategy was to ensure full control of what services and content their mobile subscribers had access to. Therefore the Korean mobile operators all chose a ‘walled garden’ approach – so that the mobile subscribers had to go through either the mobile operators’ Internet or mobile portals. The main reasons for this were:

·Have control over quality and number of mobile services/content
·Have control over price of services/content
·Differentiate offerings compared to the other operators – exclusive agreements etc.

Having full control of what services are being offered is not a bad idea, simply because you have to have a certain quality control to ensure mobile customers are not buying applications that do not work properly on all mobile phones. This has been a problem with I-mode in Japan. On the other hand, this puts the operator in a very powerful position with regards to the content owners and service creators, because the operator can dictate whether the content/service will be available or not and what price that the content owner can receive pr. sold unit!

Power is in many ways, difficult to handle, whether you are a single person or a large corporation and the Korean mobile operators stuck to their strategy of cheap mobile content and services, giving the content owners very little revenue compared to what we have seen in Europe.

A typical example would be that a mobile user downloads e.g. a game that a content creator has made. The mobile operator has decided that the game should only cost 0.2$ pr. download. Of this, the content provider gets 90%, but it is still a lot less than the same game would fetch in Europe.

Remember that the mobile operator is also getting the data traffic revenue – say 1$ in this case, so the mobile operator is getting 1.02$ and the game creator 0.18$. Needless to say, the content owners have not been very pleased with the situation, but as all three Korean mobile operators adopted the same strategy, could do very little about it. On the other hand, the sheer volume of services being bought and the fact that the market got going so fast, is on the plus side and does make it attractive to offer mobile content and services.

The Korean mobile operators have helped the content providers in other ways as well, as compensation for the low premium prices – one of the things they have done is helped pay for the development of new services and in some cases, like on mobile email, they are sharing some of their data traffic revenue with the email portal owners.

Recently, the Korean mobile operators starting thinking about changing their walled garden and pricing approach. The main reasons are that the regulative authorities in Korea are sending signals that they don’t like the walled garden approach – or how little influence the content owners have on pricing, the content owners would like to charge more, thereby making more revenue and finally, the mobile operators themselves have achieved what they set out to do and realise that they can push their ARPU (average revenue pr.user) up much higher, by simply letting the content owners charge more. An added bonus to this is that by opening up the walled garden aproach, content owners and service providers can use their own channels to advertise for the services, something they were not allowed to before.

One of the operators has already started to implement this change and it will be interesting to see whether Korean mobile users will accept that the content they are using will start rising in price, maybe effecting the otherwise steady increase in data traffic.

The Korean content pricing strategy has both pros and cons. But the bottom line is that it is very important for both the content- and service providers and the mobile operators to earn money – also in the long run – if the mobile operators want access to quality content in the future.

In our opinion, a walled garden strategy for mobile content is not the way to go – as the Koreans have worked out – as it simply has too many limitations, which can for example be seen on the types of content and services available in Korea and the time it takes to get new services on the market. Europe can actually already offer a much wider span of 2G services and hopefully, more new services will come as the 2.5G rollout continues in Europe.

And as an afterthought, although the regulative authorities often mean well, their regulation does not always have the desired effect. In this case the 10/90% split actually just meant that the operators focused on data traffic revenue instead and were almost giving the actual premium priced content away for free. From this point of view, Korea could actually learn somethingfrom Europe.

The Korean mobile market is described in detail in Strand Consults latest report “The Korean Mobile market, a window to 3G”. We spent almost 9 months analysing the worlds most advanced mobile market. We met with all the players in the mobile value chain and been honoured to have access to information not previously disclosed. We describe what the operators, the content owners and the technology companies business case actually looks like for real. With key figures and information we give a detailed description of a mobile market with over 30 million mobile customers – of which 9 million are 2.5G users, with new innovative mobile services- and
content and download speeds very similar to what we will see in Europe on 3G!

Today, the Korean mobile market is somewhere between 3 and 5 years ahead of the Europe and the lessons that can be learned from what the Korean mobile operators have achieved are many and invaluable. The strategies that the European mobile operators chose on the pricing of content and whether to adopt a ‘walled garden’ approach or not will have an enormous inpact on the success – and speed of that success – when real 2.5G and 3G content starts rolling out.
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