Mobile Personalization

Mobile service provider executives surveyed in 55 countries believe application download revenues will eclipse voice revenues by 2013, according to Freshfields Bruckhouse Derringer. Those survey results are stunning. 

Voice revenues today represent 70 percent of communications service provider revenue. By 2013, survey respondents think voice will account for 36 percent of total revenue, while app downloads will represent 37 percent and video downloads will represent 32 percent of revenue. In other words, application and content downloads will account for 69 percent of total revenue by 2013, almost reversing, in a three-year period, the historic revenue sources. 

See the press release for more detail. 

It always is possible those forecasts are too optimistic or pessimistic, depending on one's point of view. But if they do prove correct, it would illustrate just how fast the communications business, especially the mobile business, is changing. Few industries, no matter how fast moving, normally replace core revenue sources so quickly. 

We aren't talking here about adding incremental new revenues in a linear fashion. We are talking about a wholesale shift of revenue sources. Where 70 percent of revenue today is generated by voice, the respondents say they believe 69 percent will be provided by app and content downloads by 2013. 

There's a huge assumption being made, though. Mobile operators expect app downloads to become their biggest source of income in developed markets within three years.

How could that happen, when today's revenue splits typically give 70 percent of app sales revenue to developers and 30 percent to the app store provider, typically a handset manufacturer? Some respondents appear to be banking on the success of new app stores controlled directly by the service provider. Some respondents may believe they can charge application providers in some way for using the network. 

Whether that is possible or not, in the U.S. market, for example, depends on what happens with network neutrality rules. In order for app revenue to approach 37 percent of total revenue by 2013 is a huge "stretch" goal, if not a fantasy, one might argue. 

The prediction that video could contribute 32 percent of total revenue likewise is questionable. It would likely require either unrealistic sales volumes or unusual success with wholly-owned new video services. Video revenue splits rarely are better than 70/30, meaning the distributor keeps 30 percent of gross sales revenue. 

That would mean a mobile operator would sell $100 worth of video in a month to generate $30 worth of new video revenue (the content owner gets the other $70).  That might not seem like such a stretch goal, except that the analysis also assumes virtually 100-percent take rates for the new video services. That would be completely unprecedented, over a three-year period. 

Of course, mobile executives who share these views likely believe it will their business partners providing the revenue, not end users. That also will be quite a trick, especially if mobile executives think content owners will pay scores of billions of dollars in new fees of some sort for access to mobile customer bases.  The whole point of network neutrality rules is to bar mobile service providers from doing so. 

Compared to that change, some of the other shifts respondents see are almost trivial. About 48 percent of mobile executives consider developing new pricing models a critical challenge, especially a shift away from flat-rate pricing to tiered pricing based on consumption. 

Almost half of international mobile executives (48 percent) predict mobile operators will focus on developing new pricing models over the next three years, with 55 percent agreeing that tiered pricing is the way forward in mature markets and 47 percent arguing flat-rate “all-you-can-eat” data tariff plans are damaging their ability to increase revenue, according to international law firm Freshfields Bruckhaus Deringer. 

The cost of funding next-generation networks also is viewed as a critical challenge by 44 percent of respondents.

Backbone capacity was seen as crucial by 37 percent of respondents. In that regard, 60 percent of respondents believe pricing mechanisms will help mitigate strains on the network, though. 

In developing markets, though, operators are much more optimistic about their prospects for earning the bulk of  revenue from traditional voice and data. About 78 percent of mobile operators say basic voice and data pricing plans are more commercially viable than in developed markets.

About half of respondents indicate that low economic growth as one of the greatest risks facing their businesses, as well as higher-than-expected capital outlays on new networks. About 28 percent of respondents reported that capital investment was higher than they had forecast.

Almost 80 percent of mobile operators polled agree they will be better positioned to compete by opening their platforms to independent application developers and nearly half (45 percent) believe they should open their own app stores. 

Regulatory uncertainty and fears over data privacy are stalling mobile operators’ efforts to expand their service offering, it appears. Almost half of respondents (47 percent) say data privacy concerns are hindering their ability to offer third-party applications to customers. 

Loss of customer data through hacking (43 percent), absence of security software on handsets (34 percent) and downloading viruses (34 percent) are cited as the other main security risks.

The Freshfields "mobile challenges survey" was completed in June 2010 and was conducted among 391 representatives from the mobile industry from 55 countries. The participants included software providers, mobile services providers, mobile network equipment providers, integrated fixed-wireless telecommunications operators, mobile network operators, value-added services providers and content providers.

“Mobile operators are going back to the concept that content is king,” Natasha Good, partner at Freshfields Bruckhaus Deringer said. 

Any way one looks at the survey results, they are breathtaking. Either the industry is on the cusp of a dramatic recasting or executives are stunningly naive about their prospects for dramatically recasting their revenue sources. There is little other way to interpret the survey results.