understanding the mobile ecosystem

Strategy Analytics, Inc. 199 Wells Avenue, Suite 108 Newton, MA 02459 USA +1 (617) 614-0700 +1 (617) 614-0799 www.strategyanalytics.com

Understanding the Mobile Ecosystem

A White Paper Prepared for Adobe Systems Incorporated

Contents

Executive Summary______________________________________________ i

I. Introduction: The Mobile Opportunity ____________________________1

Mobile phone usage continues to grow ................................................................. 1 Mobile phones and services are changing ............................................................ 2 The outlook for mobile data..................................................................................... 5

II. Understanding the Mobile Environment __________________________8

Content ownership.................................................................................................... 9 Design/development ................................................................................................. 9 Publishing/aggregation ............................................................................................ 9 Provisioning/hosting............................................................................................... 10 Marketing/delivery................................................................................................... 10 Mobile advertising................................................................................................... 11

III. Mobile Content Business Models ______________________________12

Designer/developer business models .................................................................. 12 Mobile content value chains and revenue splits................................................. 13

IV. Mobile Content Distribution Practices __________________________14

Content delivery ...................................................................................................... 14 Wholesale distribution channels........................................................................... 15 Retail outlets ............................................................................................................ 16 Getting payment from the consumer.................................................................... 16 Getting payment from advertisers ........................................................................ 17 Plusses and minuses from the designer/developer perspective ...................... 17

V. Regional Differences ________________________________________18

Appendix: A Mobile Data Glossary ________________________________21


Strategy Analyt ics i January 2008

Executive Summary The Mobile Opportunity

The mobile phone is the most widely-used electronic device on the planet, with about a third of the world’s population having at least one. Globally, there are approximately 3.5 times as many mobile devices in use as there are PCs.

Mobile phones are not just devices for occasional use. For example, the average U.S. subscriber spends a half an hour a day on the mobile phone. The usage of this nearly ubiquitous device is rapidly changing away from purely voice communications. The mobile handset is becoming a platform for a wide variety of data applications, from taking and sending pictures—virtually all new handsets will have cameras by the end of the decade—to playing games, listening to music, watching video, and getting information from the Internet. • To support the demands of data applications, handset capabilities are growing

rapidly. Some 45% of all new handsets have slots for flash memory cards, up from only 2% in 2003; penetration will rise to almost three quarters by 2011.

• Data network capability is also increasing. Download speeds of up to 1 Mbps are possible on some of the latest commercial networks, with even higher data rates being tested.

By 2011, data services and content will make up 16% of total mobile revenues in North America, and 26% in Western Europe. Text messaging continues to be the largest single component of mobile data usage, but infotainment, which includes games, audio and video (both streaming and downloaded) and information services, is the fastest growing segment.

Understanding the Mobile Environment

In order to take advantage of the opportunities in mobile content, developers and designers need to be aware of the ways in which the mobile content business practices differ dramatically from those of the desktop Internet world. In particular, the operators of mobile networks exert a degree of control over the distribution and use of content that has no analogy in the desktop environment.

The key actors in the mobile value chain are:

• Content owners, ranging from multinational entertainment conglomerates to individual artists

• Designers and developers, who prepare content for mobile distribution and use

• Publishers and aggregators, who assemble, test, and promote mobile content

• Provisioning and hosting providers, who provide the actual physical means for content distribution

• Marketing and delivery agents, which includes the mobile operators, as well as others who sell mobile content to end users


Strategy Analyt ics i i January 2008

Advertising is just beginning to become significant in the mobile content world. Advertisers see potential in an audience of mobile consumers, and their global expenditures for mobile ad placement, roughly $1 billion at present, should grow to almost $15 billion by 2011.

Mobile Content Business Models

This relatively complex mobile content value chain implies that revenue from consumer sales has to be divided among multiple players. Given the relative youth of the industry, business practices for accomplishing this are still evolving. Content developers and designers looking to get into the mobile world have a number of different business models to consider, each with its own advantages and disadvantages. These range from simply creating content for hire for a publisher, which has relatively low risk but limited upside, to various revenue sharing models and even direct sales to consumers. Advertising supported content development is beginning to be more common.

Revenue sharing practices in the value chain are far from standard, and vary with such factors as: • The relative importance and strategic objectives of mobile operators

• The brand equity of the content

• The number of different intermediaries involved

As a general rule of thumb, about 45% of revenues at retail are likely to be passed back to the content owner and designer/developer—which in some cases are the same entity. This is an average, however, and may vary widely from situation to situation.

Mobile Content Distribution Practices

The ways in which content is actually delivered to mobile handsets are changing. Initially, the predominant model was “over the air,” which used the mobile operator’s network to transmit content. This gives the operator great control over what gets put on mobile devices. Increasingly, however, consumers are using other means to deliver content, including downloading to a PC and then transferring to the handset—a process referred to as “sideloading.”

The process of distributing content can be complex, and is sometimes managed by wholesale distributors on behalf of mobile operators. Prominent wholesalers include NTT DoCoMo’s i-mode service and Qualcomm’s BREW. Retail outlets—typically online catalogs—are run either by mobile operators or by independent entities, including handset manufacturers.

A wide variety of means are employed to make consumers aware of content and allow them to purchase it, including text messaging and scannable codes embedded in print media. Payment can be made in many ways as well, and often uses the mobile operator’s billing system.

There is no one “best practice” for a designer/developer to follow in choosing a distribution method. The options available in each individual situation must be examined carefully to determine the method that will maximize revenue or meet other strategic goals.


Strategy Analyt ics i i i January 2008

Regional Differences

Japan and Korea are by far the leading users of mobile data, with average spending on data services approaching $25 per month. However, spending in North America and Western Europe, currently in the $10-15 range, is increasing.

Content distribution in North America is much more dominated by mobile operators than it is in Europe: something on the order of 70-80% of mobile content in North America is delivered through operator-controlled channels, as compared to 30% in Western Europe.


Strategy Analyt ics 1 January 2008

I. Introduction: The Mobile Opportunity

Mobile phone usage continues to grow The mobile phone is arguably the success story of the modern electronics industry. Starting as a rare, high-end business tool less than 20 years ago, mobile phones are now in the hands of almost a third of the planet’s population. In contrast, less than one person in six uses a PC. Mobile handset sales are expected to top 1 billion units worldwide in 2007, four times most estimates for PC sales. Combined sales of portable game consoles and music/media players are only expected to reach 167 million globally. • Even in North America, where penetration is already high, the base of users

continues to grow. About 68% of the population had at least one mobile phone at the end of 2006, and this is expected to grow to 76% by 2011. Since many people have multiple mobile subscriptions the ratio of subscriptions to total population is even higher—around 80% at present, and growing.

• Growth will be truly dramatic in Asia and in less developed parts of the world, where lower cost mobile phones are more practical in some cases than wireline service.

• Only in Western Europe, where 4 out of 5 people already have mobile phones, is the number of users expected to grow at less than 1% per year through the end of the decade.

Worldwide Mobile Users

2002-2011

0

200

400

600

800

1000

1200

1400

2002 2004 2006 2008 2010

Mil

North America

Western Europe

Asia Pacific

Rest of World

Source: Strategy Analytics, Wireless Network Strategies

Worldwide Mobile Users

2002-2011

0

200

400

600

800

1000

1200

1400

2002 2004 2006 2008 2010

Mil

North America

Western Europe

Asia Pacific

Rest of World

Source: Strategy Analytics, Wireless Network Strategies Moreover, not only do more people have mobile phones, but they are spending more time using them. This is particularly true in North America, where aggressive pricing of voice plans has resulted in the average user spending about a half hour a day on the phone. And even in Western Europe the average user is expected by the end of the



decade to log some 400 minutes of use per month (MOU – a common industry measure of traffic volume). (Linked terms are included in the Glossary at the end of this report.)

Average Minutes of Use (MOU),

2002-2011

0

100

200

300

400

500

600

700

800

900

1000

2002 2004 2006 2008 2010

Avg

. M

in/u

ser/

mo

nth North America

Western Europe

Asia Pacific

Rest of World


Average Minutes of Use (MOU),

2002-2011

0

100

200

300

400

500

600

700

800

900

1000

2002 2004 2006 2008 2010

Avg

. M

in/u

ser/

mo

nth North America

Western Europe

Asia Pacific

Rest of World


Mobile phones and services are changing At the same time that more people are spending more time using mobile phones, the phones themselves and the way people use them are changing dramatically. As the chart below shows, dramatically fewer people are using their phones just to make voice calls.

Mobile phone users who only use voice services

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

North America Western Europe Asia Pacific Rest of World

% o

f to

tal

users

2001 2006

Source: Strategy Analytics, Global Wireless Practice The growth in data usage is most pronounced in Western Europe and Asia, where only small minorities of users are voice-only. Even in the U.S., which tends to lag in mobile usage trends, about half of all mobile phone users are doing something with their



phones besides just talking on them, up from less than 20% in 2001. For the purposes of this report, “data usage” is any non-voice application that uses the mobile handset as the delivery platform; this includes everything from text messaging to downloading games, music and videos to getting turn by turn driving directions.

Text messaging accounts for much of this non-voice use, but mobile phones are increasingly becoming platforms for entertainment, for capturing and sharing video and still pictures, and for displaying multimedia information streams. As the chart below shows, virtually all of the 800-900 million phones expected to be sold in North America, Western Europe, and the Asia Pacific region by the end of the decade will be equipped with cameras and/or music. And as more operators solve the technical and marketing issues involved in providing video content, TV phones will exceed 100 million units sold.

Growth of Multimedia Handsets* (N. Am, W.

Europe, Asia Pacific) 2002-2011

0

100

200

300

400

500

600

700

800

900

2002 2004 2006 2008 2010

Sale

s (

Mil u

nit

s)

Camera Phone

Music Phone

TV Phone

Source: Strategy Analytics, Wireless Device Strategies

* Overlap permitted: i.e., any given handset may have

one, two, or all three features

Growth of Multimedia Handsets* (N. Am, W.

Europe, Asia Pacific) 2002-2011

0

100

200

300

400

500

600

700

800

900

2002 2004 2006 2008 2010

Sale

s (

Mil u

nit

s)

Camera Phone

Music Phone

TV Phone


* Overlap permitted: i.e., any given handset may have

one, two, or all three features

(Note: this report focuses primarily on mobile handsets that are designed for voice communications, whatever other capabilities they may have: the classic “cell phone” and its descendents, in other words. However, a wide range of other consumer electronics devices like ultra portable computers, media players and game devices are likely to incorporate mobile connectivity and even voice capability in the coming years. The downside of this is increased definitional confusion, but the upside is an even larger base of platforms for mobile data applications.)



The capabilities of mobile handsets have been evolving rapidly to support this new interest in data services, aided by falling costs and better quality for key components such as display screens, audio and video codecs, memory, and processors. • As recently as 2003, only 2% of handsets shipped worldwide were equipped with

slots for removable memory cards. This has risen to 45% at present, and by the end of the decade, almost three quarters of all handsets will have card slots. With 1 GB cards already available for well under $20, consumers have affordable access to storage capacity for music, videos, games, and other content that was unthinkable a few years ago.

• Handset screens have become significantly larger in recent years, allowing for the display of more visual content. As the chart below shows, about 2/3 of all new handsets introduced have screens larger than 25K total pixels (e.g., 144 by 176). This is almost double the proportion of screen sizes available only three years ago.

Q3 2004 Handset Introductions

<10K

15%

10-25K

49%

25-100K

36%

100K+

0%


<10K

1%

10-25K

32%

25-100K

65%

100K+

2%

Source: Strategy Analytics, Handset Component Technologies

New Handsets by Total Pixel Count in Main Display


<10K

15%

10-25K

49%

25-100K

36%

100K+

0%


<10K

1%

10-25K

32%

25-100K

65%

100K+

2%

Source: Strategy Analytics, Handset Component Technologies

New Handsets by Total Pixel Count in Main Display

In order to support these new services, operators have been aggressively building out more data-capable networks. At this point some 250 million subscribers worldwide have access to mobile services with data rates in the lower end of broadband speeds. There are heated discussions in the mobile community about what exactly constitutes “third generation” (3G) technology, but in general 3G services now offer data rates significantly higher than those of earlier mobile data technologies which could support at best limited text-oriented data services. (See the Glossary for a discussion of mobile phone generations.) Speeds will be even faster in the near future.



Mobile Data Technology Generation Introduced

Typical download

speed

Typical time to download 1 min video (seconds)

GPRS (General Packet Radio Service) 2.5 2001 56 kbps 103.6

EDGE (Enhanced Data Rates for GSM Evolution) 2.5 2002 120 kbps 48.3

UMTS (Universal Mobile Telecommunications Standard)

3 2001 220-320 kbps 21.5

HSDPA (High Speed Downlink Packet Access) 3.5 2005 1 – 2 Mbps 3.9

CDMA2000 1xRTT (Radio Transmission Technology) 2.5 2002 80-100 kbps 64.4

CDMA EV-DO (Evolution-Data Optimized) 3 2001 300-500

kbps 14.5

CDMA EV-DO Rev A 3.5 2004 450-800 kbps 9.3

As the following chart shows, sales of 2 and 2.5 G mobile handsets have already started to decline in all regions of the world. By the end of the decade they will have been almost entirely supplanted by the much more capable 3 and 3.5G devices.

3/3.5G

2/2.5G

Global Handset Sales by Technology, 2002-2011

0

200

400

600

800

1000

1200

1400

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Mil

NA

WE

APAC

ROW

NA

WE

APAC

ROW


3/3.5G

2/2.5G


0

200

400

600

800

1000

1200

1400

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Mil

NA

WE

APAC

ROW

NA

WE

APAC

ROW


2/2.5G


0

200

400

600

800

1000

1200

1400

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Mil

NA

WE

APAC

ROW

NA

WE

APAC

ROW


The outlook for mobile data There are many reasons to expect that mobile data will continue to grow. As discussed above, handset OEMs have committed to producing increasingly capable devices able to take advantage of new data services. Content owners and media companies are starting to dedicate significant resources to getting presence on “the third screen,” otherwise known as mobile handsets. (The first and second screens are, of course, the TV and computer.) Finally—and a particularly compelling reason to expect that mobile data usage will continue to grow—is that mobile operators need it to, in order to thrive financially.



Voice services still make up the largest part of operator revenues, but there are fewer and fewer new voice users and the ARPU (average revenue per user) from voice calling stabilizes or in some cases even declines. (Verizon Wireless’ voice ARPU, for example, dropped by 11% from the end of 2004 to the end of 2006.) Consequently, to keep growing, operators must derive more revenue from data. Strategy Analytics projects that overall, as shown in the following chart, data revenue will increase from a very small percent of total service revenue in 2002 to almost a quarter of the total in 2011. (Unless otherwise noted, “data revenue” in this report refers to the amount that end users pay to mobile operators for all their data usage—text messaging, content downloads, etc. It does not include payments from advertisers, which is currently fairly small, but is expected to grow.)

Worldwide Mobile Voice and Data Revenue, 2002-2011

0

100

200

300

400

500

600

700

800

900

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$ b

il

Data revenue

Voice revenue

Source: Strategy Analytics, Wireless Media Strategies

7% annual growth

24% annual growth


0

100

200

300

400

500

600

700

800

900

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$ b

il

Data revenue

Voice revenue



0

100

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300

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800

900

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$ b

il

Data revenue

Voice revenue


7% annual growth

24% annual growth

In their efforts to ensure this data growth, operators and OEMs are trying to position the mobile handset as a platform for entertainment, information services, productivity tools, and personal community building, as well as just a way to talk. One of the key ways they are accomplishing this is by switching to flat rate pricing for data services. Initially, a lot of data services were priced on a volume basis: $X per downloaded kilobyte. However, users generally prefer the flat rate pricing schemes they are used to from their cable or DSL providers, and major operators are moving in that direction. In the UK, for example, Orange recently introduced a flat rate of £8 per month for unlimited data use.

The Asia Pacific region, led by Korea and Japan, is the hotbed of data usage: data already constitutes 26% of total operator revenues there, and will continue to grow. However, rapid growth is also expected in North America and Western Europe, where data is expected to constitute 16% and 26% of total 2011 revenue, respectively.



Mobile Data Revenue, 2002-2011

0

50

100

150

200

250

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$ b

ilRest of World

Asia Pacific

Western Europe

North America


Mobile Data Revenue, 2002-2011

0

50

100

150

200

250

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$ b

ilRest of World

Asia Pacific

Western Europe

North America

Source: Strategy Analytics, Wireless Media Strategies Messaging, which is still primarily text messaging (or SMS), will continue to be the largest single component of data revenue for the foreseeable future. However, as the following chart suggests, the most rapid growth will come in the area of infotainment.

Major Data Revenue Components

0%

20%

40%

60%

80%

100%

2002 2011

% o

f to

tal d

ata

reven

ue

Personalization

Infotainment

Messaging

Video Telephony


Major Data Revenue Components

0%

20%

40%

60%

80%

100%

2002 2011

% o

f to

tal d

ata

reven

ue

Personalization

Infotainment

Messaging

Video Telephony

Source: Strategy Analytics, Wireless Media Strategies Infotainment includes a wide range of applications, including:

• Games, both downloaded single player games and multiplayer online games

• Audio downloads, including full music tracks, podcasts, and audio books. (Ringtones, whose growth is tapering off, are included as part of Personalization.)

• Streaming audio, such as Internet radio

• Video downloads and video streaming

• Information services, including weather, news, financial information, travel updates and so on, which may be delivered through web browsing sessions or through short message service (SMS) messages.



One way in which infotainment can take advantage of unique mobile phone capabilities is by incorporating location-based information. A number of North American and European operators have started to offer mapping and navigation services on the handset, including both turn by turn directions and family/friend finder services. The latter allows parents, for example, to check on the location of their children, or allows friends in social networks to find one another. In North America alone, Strategy Analytics expects users to spend some $2.2 billion on mobile location services.

II. Understanding the Mobile Environment Companies or individuals used to working in the TV or PC content and communications world may initially find the mobile ecosystem unusual in many respects, particularly in the degree to which content distribution is controlled by the mobile operator. This operator control, which is substantially stronger in the U.S. than in many other regions, has no real analogy in the modern web, where anyone can publish content without negotiating with an ISP, for example. (The old “walled garden” approach of AOL and others in the 1990’s is perhaps the closest counterpart.)

This operator-centric model of mobile communications began as a fairly straightforward adaptation of the early wireline business: mobile operators provided devices on which to make voice calls, maintained a network to carry those calls, and billed customers for their usage. However, wireless communications has changed dramatically in recent years, creating a much wider range of industry participants.

• Traditional mobile operators, like Vodafone, AT&T, and Verizon still provide service and billing to end users over their own networks, but new players called “mobile virtual network operators” (MVNOs) provide service to customers under their own brands using network capacity that they purchase from the traditional operators at wholesale rates.

• In the U.S. most customers get their handsets through their mobile operator, but in the rest of the world it is common to buy handsets from independent retailers and sign up for service separately.

• A small number of original equipment manufacturers (OEMs) like Nokia, Samsung, Motorola, Sony-Ericsson, and a few others make the vast majority of the handsets used around the world which are sold under the manufacturer’s brand. However, the relative standardization of much handset design has allowed “original design manufacturers” (ODMs) to make private label phones for operator branding, or to produce small runs of specialty phones. Apple’s recent iPhone introduction suggests that even at this late date major new entrants into the OEM world are possible.

The participants in the mobile data world form an even more complex ecosystem, which for simplicity can be summarized by the functions described in the following chart. It is important to note that any given company may perform more than one of these functions. Some examples are cited in a table following the functional descriptions.



Content

Ownership

Design/

Development

Publishing/

Aggregation

Provisioning/

Hosting

Marketing/

Delivery

Cu

sto

mer

Cu

sto

mer

Functional Roles in Mobile Data


Content

Ownership

Design/

Development

Publishing/

Aggregation

Provisioning/

Hosting

Marketing/

Delivery

Cu

sto

mer

Cu

sto

mer

Functional Roles in Mobile Data


Content ownership User generated content is gaining importance in the mobile world, but most of the content that mobile consumers access—which ranges from simple ringtones to complex multiplayer games and location-based information—originates with a commercial entity. Owners of mobile content could be a movie or music studio, a book publisher, a newspaper or TV network, a sports league; anyone controlling the rights to content that could be provisioned on a mobile device.

Generally speaking, the revenue that content owners gain from mobile usage is a small part of overall content revenue. For this reason, owners are often very concerned with the context and quality of the mobile presentation of their content; it does not make sense to jeopardize the overall brand equity of a popular cartoon figure, for example, by distributing poor quality mobile games featuring that character.

Design/development Existing content often has to be modified for mobile platforms. Games originally intended for console or PC play may have to be redesigned or recoded for devices with smaller screens and less graphics processing power. “Mobisodes,” short video dramas intended for mobile handsets, are sometimes edited from full screen versions, but sometimes have to be reshot to put actors closer to one another.

One of the major challenges for designers and developers has been the diversity of mobile hardware and software platforms relative to the PC environment. This has meant that the desirability of having content available on many devices has had to be weighed against the costs of making different versions for different handsets (a process known as “porting”). Development platforms like Adobe® Flash® Lite™ are starting to minimize this problem by providing a common environment across multiple device types, and by assisting in bringing to the mobile arena content that has been developed and tested in the desktop world. Also, tools like Adobe® Device Central CS3 are helping designers and developers understand this diversity by providing information on the capabilities and constraints of specific mobile devices.

Publishing/aggregation Content owners and developers typically do not have a channel to promote content to consumers and manage relations with operators, and creating a channel is not easy, even with substantial resources to expend. Disney, for example, launched two MVNOs based on its own content (ESPN and Disney Mobile) to promote directly to consumers, but ultimately shut both of them down.



Publishers and aggregators are specialists who take content from multiple sources, test and validate that it operates on different devices and networks, price and promote the content to operators and other distributors, creating content bundles as appropriate. If content is going to be embedded in handsets prior to shipping, publishers often work with the OEM/ODM to provide the content in the appropriate format.

Provisioning/hosting This is the stage in which content is actually delivered to consumers. This can include providing hosting services that physically store and deliver content ordered from network operators or others. Provisioning and hosting providers obviously need to integrate closely with operators’ billing systems, and in some cases they actually take on the billing function. Consumers may not have any direct awareness of the provisioning and hosting services, as they are often managed for the operators on a private label basis.

Marketing/delivery Initially, mobile operators were the only source of non-voice content for end users, and even though other players have entered this portion of the value chain, operators are still critical in the process by which consumers learn about new content, acquire and pay for it. Other key players in this part of the value chain include: • OEMs. Handsets often come pre-loaded with some content, but some handset

manufacturers are interested in playing a more active role in providing mobile data. Nokia, most notably, has recently launched Ovi, a new direct-to-consumer content offering for owners of its N-series handsets. Ovi could expand beyond its initial focus on music sales, to including advertising supported free content. It has also launched Nokia Content Discoverer (NCD) which resides on the handset and functions as a catalog of available content. OEMs like Nokia must be careful in such direct to consumer offerings to avoid conflict with the content sales efforts of the operators, who after all are their biggest customers.

• Independent retailers. So-called “off portal” vendors market content to consumers directly. One popular method of delivering off portal content is via short message service (SMS) codes. A consumer might see an advertisement for a screensaver, for example, and send a text message to the SMS number in the ad; the off portal vendor downloads the file to the phone, with the cost typically appearing as a charge on the consumer’s phone bill.



Functional Role Example Companies

Content ownership

NASCAR FIFA Walt Disney Sony Music

Design/development

American Greetings Interactive Electronic Arts/JAMDAT Gameloft Moket

Publishing/aggregation Gameloft Qualcomm BREW Handango

Provisioning/hosting In-Fusio Motricity Qualcomm BREW

Marketing/delivery

Verizon “Get it now” Orange Music Store Nokia Ovi Handango

See Section IV for more information on delivery methods.

Mobile advertising Until recently, there was no significant advertising presence in the mobile market. However, advertisers are beginning to look at the mobile handset as an advertising platform with distinct advantages, and they are projected to become more important players in the value chain. As the following chart suggests, the next few years should see a dramatic growth in the amount that advertisers spend for time and space in media consumed on mobile devices. (Note that this does not include expenditures for preparing mobile advertising material.)

Worldwide Mobile Advertising Spending, 2002-2011

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$ m

il

Video/TV

In-game/in-app

Search

Web

Messaging


Worldwide Mobile Advertising Spending, 2002-2011

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$ m

il

Video/TV

In-game/in-app

Search

Web

Messaging

Source: Strategy Analytics, Wireless Media Strategies Advertising can be delivered in many ways: • Opt-in schemes to send ads via text or multimedia message

• Display space on websites accessed by mobile users

• Search-based ads (similar to PC search ads), that appear next to search results



• Ads that are built into or served into games or other online applications like TV program guides

• Ads that accompany downloaded or streaming video, or mobile TV broadcasts

III. Mobile Content Business Models

Designer/developer business models Given the relative short period of time in which there has been an active mobile data market, and the great number of different players and types of players in the market, it is not surprising that business models are still evolving. A lot depends on the type of content, and there is no one “best practice.” However, looking at the situation from the perspective of the content designer/developer, there are a few different models that seem to dominate current practice:

• Development for hire. This is the simplest model, and is used in situations where, for example, a large content owner might see an opportunity for a mobile game based on a licensed character, but does not have the internal capacity to develop the game and optimize it for different mobile platforms. The content owner will hire a studio to create the game for a flat professional fee or time-and-materials, and will deal with the rest of the distribution chain itself.

• Revenue sharing through publishers. This model gives the designer/developer the opportunity to share in the rewards, if the content turns out to be particularly popular. Revenue sharing can be managed different ways, but a common one is for the entity that collects the revenue from the consumer—the mobile operator, for example, or an off portal retailer—to pass the revenue up the chain to the publisher, retaining an agreed-upon margin. The publisher then pays the designer/developer and any other parties to the transaction, such as a hosting service.

• Direct to consumer. This model typically pertains to larger designers/developers, who have established a consumer brand identity with other products. In this case, the designer/developer will typically have a desktop and/or mobile website to promote and sell content directly. Universal Mobile Entertainment, a subsidiary of Universal Studios, is planning to launch a website to promote its own branded mobile content; while Universal expects that most of its actual sales will still come from operator portals, the website will be a sales channel as well as a promotional vehicle.

• Advertising supported. As noted above, advertising is still a relatively new factor in the mobile space. So far designers and developers have benefited primarily by creating and/or modifying the advertisements themselves. Product placement in mobile content is one of the more promising avenues for incremental developer revenue; prevalent for several years in console and PC games, it will inevitably shift to the mobile phone world. Some large companies do commission developers to create mobile content for promotional purposes, contests, etc., but a more common practice is for operators to follow something more like the television network model. In other words, they develop opportunities for ad content placement in conjunction with ad sales partners like Yahoo! and sell this inventory to appropriate advertisers, e.g. vitamin water on a sports clip service. To the extent that mobile advertising



creates more revenue for mobile operators, the terms of upstream revenue sharing might become more generous (see the following section).

Mobile content value chains and revenue splits As a relatively new market with rapidly evolving technology and many different players in its value chain, mobile data has a wide variety of payment sharing schemes and practices. Not surprisingly, how much of the customer’s expenditure stays with each value chain participant depends heavily on relative market power and value-added attributes. The following chart shows a typical way in which revenue is allocated among the entities that provide different functions on the value chain.

Content

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Typical Revenue Splits in Mobile Data


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Factors that can vary the allocation of revenue among the different players include: • The mobile operator’s strategic objectives. In the early years of its i-mode service, for

example, NTT DoCoMo made the conscious decision to encourage a large content community by decreasing its own share of revenue, in some cases to as low as 9%. Similarly, while Maxis, a Malaysian mobile operator, was trying to encourage use of its GPRS network, it passed 70% of revenue on to its partners for GPRS content, as opposed to 60% for SMS.

• The brand equity of the content, which in many cases is a function of the size of the non-mobile audience for the content. Content providers with a strong franchise outside the mobile world, like Disney with Mickey Mouse, can capture a higher percentage of the revenue than content that is less well known.

• Number of intermediaries. Direct to consumer content provisioning is likely to leave content providers more of the revenue stream than models that heavily involve other players in providing marketing and billing functions. However, these functions still need to be performed, and obviously have associated costs.

• Competition from other delivery modes. Downloading songs over the air from a mobile operator is only one of several ways to get music to listen to while on the go. Consequently, mobile operators in some regions are passing on as much as 85% of the download fee to the music publishers and rights owners.

• Regional effects. Different regional practices, particularly the degree to which mobile operators control content delivery, can affect revenue distribution. However, regional differences explain much less deal-to-deal variation than the other factors mentioned here. This will be discussed in more detail in Section V. Regional Differences.



The revenue splitting arrangements that have evolved in the industry have all presumed that revenue is generated through the sale of content to consumers, whether on a subscription or a by-the-piece basis. As advertising supported content becomes more common, the models will need to adjust so that all parties are adequately compensated for the value they contribute to the process.

IV. Mobile Content Distribution Practices Just as there are multiple different business models, there are many different ways by which content is actually discovered by users and delivered to handsets. What they all have in common is the need to make the process as simple and easy to use as possible for the consumer, given the limitations of handset size, user interface and wireless network bandwidth.

Content delivery In terms of the actual connection that gets bits onto a handset, there are two alternatives: • Download the content over the wide area cellular network (over the air) directly to the

handset.

• Use another form of connectivity (USB cable, Bluetooth, Wi-Fi or another short range wireless technology, or a removable memory card) to transfer content from another source, such as a PC. This is referred to as “sideloading.”

Historically, operators have favored over the air delivery, as it gives them greater control over what can go onto the handset. In fact, operators and OEMs have often limited the kinds of sideloading that can be done, as well as the kinds of applications that can be installed, reflecting in part security concerns and hardware limitations. The iPhone, for example, initially was not going to be open to third-party applications; Apple has subsequently changed its position on that.

It also allows them to drive traffic over the cellular network and generate transport revenues for data that is priced on a time or volume basis. However, as more operators move towards flat rate billing, the transport revenue argument is diminishing in importance. In addition, sideloading frees up network capacity for other applications like online gaming that require real-time connectivity. As a result, operators’ tolerance for sideloading is increasing. Verizon Wireless, in fact, actually encourages sideloading content from its music store, by charging more for songs downloaded over the air.

In terms of the larger process by which consumers order and receive content, the increasing capabilities of both handsets and networks have allowed the number of delivery methods to multiply. Some of the major ones include: • WAP push. Wireless Application Protocol (WAP) is an open standard developed in

the early years of mobile data to allow handsets to access the Internet. In WAP push systems, the consumer receives a short message that contains a clickable link, not unlike a URL embedded in an email, that causes the content to be downloaded. The consumer may have opted in to a service that sends such messages in areas of interest, or may have initiated the exchange in response to a print ad, or may have found something of interest while browsing the mobile web.



• Short codes. Short codes are special short phone numbers (3 to 8 digits, depending on the country) primarily used to receive specialized SMS messages, which in turn can begin delivery of content. An ad for a movie might contain a short code; a text sent to the short code could trigger the downloading of a screen saver based on the movie.

• Embedded codes. In order to eliminate the step of requiring the consumer to key in information, various schemes have been developed to take advantage of handset capabilities to capture information automatically.

• Quick Response (QR) bar codes are being used in Japan to promote content, especially music. QR barcodes are printed in magazine ads, posters, etc. Consumers take pictures of them with their camera phones, which decode the bar code information and take appropriate action, such as starting the process to download a sample of a song.

• Fujitsu has experimented with a version of this called “Fine Print Code” which embeds the code invisibly into still images.

• An Asian startup, ColorZip, has devised an encoding scheme that uses 2D color patterns to embed download or other information that can be interpreted by software on a camera phone. One advantage over bar coding is that the color pattern can be used as part of the overall graphic design.

• Nokia has experimented with Near Field Communication (NFC) (a very short-range radio technology) as a way to facilitate downloading content. In a mobile payments trial in a sports stadium in Atlanta, NFC-equipped handsets were able to read RF tags embedded in posters, which triggered the download of appropriate content.

Wholesale distribution channels Wholesale channels include companies that provide various intermediary roles in getting content from designer/developers to whatever retail outlet actually sells it to the consumer. These functions include acquiring content from multiple sources, testing and validating its technical compatibility with targeted networks and devices, promotion and advertisement, assembling packages of related content, and providing hosting and distribution services to retailers. Two major wholesalers are: • NTT DoCoMo’s i-mode service. One of the pioneers of mobile data services, i-

mode was launched in Japan in early 1999. i-mode in Japan has several thousand authorized content partners, who use DoCoMo’s services to distribute and bill for content. In addition, many thousands of other developers write to i-mode specifications and provide “unauthorized” content. In addition to DoCoMo in Japan, i-mode services are available through some 16 operators around the world.

• Qualcomm’s BREW. BREW (Binary Runtime Environment for Wireless), launched in 2001, is both an application development platform similar to Java for mobile platforms (J2ME) and an application certification and distribution program administered by Qualcomm. Qualcomm claims that as of mid 2006 developers and publishers had received more than $700 million from the sale of BREW content. BREW currently has 26 operator customers around the world, primarily but not exclusively CDMA operators like Verizon Wireless.



Retail outlets The primary categories of retail outlets, through which consumers actually acquire content, are “on deck” and “off deck” (sometimes referred to as “on/off portal”). • On-deck. This refers to access to content that is controlled by a mobile operator,

whether directly through a mobile Internet site or through a conventional website managed by the operator. Operators that rely exclusively on the on-deck model are sometimes said to be employing a “walled garden” approach. Operators can make users aware of on-deck content in many ways: a traditional website, or a catalog that is stored in the handset and updated over the air, or even by advertisements and printed bill inserts.

• Off-deck. Off-deck content comes from a third-party source, such as an independent mobile content retailer (e.g. Jamster, Handango) or a handset OEM, such as Nokia, as discussed above.

The distinction between on- and off-deck is not absolute. In fact many off-deck retailers provide the same content through operators’ on-deck operations.

Getting payment from the consumer Payment for mobile content can be handled in several different ways, of which the simplest (and most common for on-deck purchases) is simply to add the amount onto the customer’s mobile phone bill (or deduct it from the account balance, in the case of prepaid phone customers). • One way to accomplish this is Premium SMS billing, which involves having one text

message between customer and content provider be billed to the customer at a premium rate, which is the cost of the content. (Most operators’ billing systems will support coding some messages as Premium, and attaching a specified amount to them.)

• Operators also have the option of allowing selected third parties to have so-called “direct to bill” access – i.e., they are empowered to write transactions to the operator’s billing system. Needless to say, operators tend to be fairly selective in who they grant direct-to-bill privileges. An initiative has recently been launched in the UK to standardize direct to bill practices for customers of all five mobile operators; PayForIt, as the service is called, allows all content on approved sites to be available across the entire domestic market with the same billing process.

Other payment methods include: • Credit/debit card. Particularly for larger purchases, where it is easier to absorb the

transaction costs, or for subscription-based content services, customers can use credit or debit cards to pay for content, just as they do on the fixed Internet. There is some consumer reluctance, partly because it is inconvenient to enter long strings of credit card data to do this from the handset, and partly due to security concerns.

• Interactive voice response (IVR). By placing a voice call to a designated number and going through a voice response menu, it is possible to avoid use of the keypad altogether. The actual billing for content can be handled either by having the IVR transaction trigger a Premium SMS, or by setting up the calling number as a premium voice service number (such as a 900 number in the U.S.).



• Stored value. The simplest form of stored value payment is for the consumer to pre-fund an account with the content seller, from which content purchases are deducted.

• Prepaid or gift cards. Consumers can buy a card or other physical token that contains instructions for downloading content; the purchase price of the card covers the cost of the content. Although not a major payment mechanism, this has been useful as a way of packaging content in a physical form that can be given as a gift.

Some payment intermediaries are beginning to offer content providers services that select the best possible payment options (i.e., the best percentage return to the content provider) in a given market, and manage the relationship with the various billing entities.

Most mobile content is purchased on an item-by-item basis, but subscription plans have been tried, and have some obvious advantages to providers in terms of predictability of the revenue stream. Fox Mobile has recently announced a $9.99 per month exclusive subscription plan for all mobile content related to the Fox cartoon series, The Simpsons.

Getting payment from advertisers The mobile advertising market is in a very early stage of development, and models for payment systems are still being worked out, so there are very few standard practices. When designers/developers create or repurpose the ads themselves, this is typically done on a work-for-hire basis. Distribution of revenue for advertising within content (e.g., product placement) is likely to be managed by either the mobile operator or by a growing number of ad placement networks, such as Yahoo, Doubleclick, Third Screen Media, or AdMob.

Plusses and minuses from the designer/developer perspective Because the specifics of content publishing deals can vary so widely, it is impossible to say that any one set of delivery practices is better or worse for the content provider. And in fact a content provider may select different models for different types of content, preferring, for example, SMS-based promotion and distribution for simple, mass-market products, while using an off-deck catalog approach for a more complex product. So rather than prescribing one best approach, it makes more sense to focus on a few principles that should govern the choice of distribution arrangement. • Other things being equal, an arrangement that maximizes the content provider’s

share of total revenue is preferable. However, other things are rarely equal. For example, off-deck sales from the content providers’ own site would reduce the percentage of revenue taken by others in the value chain, but it leaves the content provider responsible for marketing, hosting, billing, and other functions. Similarly, a revenue-sharing arrangement with an IP owner has the potential for a long-term revenue stream, but may carry considerable risk; unless the IP has significant brand equity, a for-hire development contract might be a better arrangement. A designer/developer may be able to get a better revenue split by offering an exclusive content deal, but this may limit total revenue potential if the exclusive channel does not generate sufficient volume. Finally, if users are unfamiliar or uncomfortable with a particular delivery mode, a lower margin but more widely accepted mode may yield better results.

• To build a sustainable mobile content business, it is important to maximize the number of subscribers exposed to the content. It can take a significant investment in



time and resources to become certified by a major wholesaler like i-mode or BREW or to penetrate major distributors, but the resulting reach can be significant.

• Accurate, timely, and complete reporting of sales information is critical, not just to ensure that payments are being made correctly, but to understand what end users want and are willing to pay for. There may be convenience in intermediary systems that insulate the content provider from the details of the transaction process, but it is important not to lose the information from the marketplace.

V. Regional Differences The chart below confirms the conventional wisdom that Japan and Korea are the global centers of mobile data use. Not only do an overwhelming majority of their mobile phone customers use data services, but they spend twice as much per month on data as their counterparts in Western Europe and North America. The rest of Asia also has a very high prevalence of data usage, but much lower spending, since a lot of its data traffic consists of person-to-person messaging.

Prevalence and Intensity of Data Use by Region, 2007

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Source: Strategy Analytics, Wireless Media Strategies However, it would be a mistake to assume that Japan and Korea are identical. Mobile data usage skews much more heavily towards infotainment in Korea, where it currently accounts for two thirds of data revenue, as compared to less than half in Japan.

Infotainment is also a very important part of the revenue mix in North America, where it accounts for about a third of total data revenue. Downloaded games are relatively more important in North America and Western Europe, where they provide 16% and 18% of all infotainment revenues, than they are in Asia (5%). Asian consumers are much more likely to participate in mobile multiplayer games, however: 4% of all mobile users in Korea engage in multiplayer games, as compared to less than 1% in Western Europe and North America.

Mobile data business models vary greatly from region to region. North America is heavily dominated by operator-controlled distribution of content. Verizon, the second largest



operator on the continent, supports virtually no off-portal content, and while the other operators are a little more open, it is still a very different situation than in Europe, where off-portal content access is the rule, not the exception. • Precise statistics are impossible to come by, but most industry watchers estimate

that some 70-80% of mobile content in North America is delivered on-portal; in Europe, on the other hand, the on-portal percentage is more like 30%.

As might be expected, stronger operator control over mobile content delivery will tend to increase the operator’s share of revenue. In regions like North America and some parts of Asia, where operators play a more dominant role in content distribution, the marketing/delivery function will claim a larger than average share of retail spending. In a market like Europe, where there are multiple non-operator channels, operators may take a smaller share, but the marketing and promotion demands of a crowded, competitive market will increase the share claimed by aggregators and distributors.

However, the revenue split on any given deal depends much more likely on the specifics of the deal, such as the brand value of the content, the exclusivity, etc., than on national market characteristics.

Subscription models of paying for content have been somewhat more prevalent in Japan than elsewhere, partly due to difficulties that the original i-mode billing system had with single purchase events. It is not clear whether they will gain much traction elsewhere, as consumer preferences appear to be for ad hoc purchasing.



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Appendix: A Mobile Data Glossary Term Definition

(Terms in bold italics can be found in the glossary.) 3G Third generation mobile phone technology, the first

generation being analog voice and the second being digital voice with limited data connectivity. There is some disagreement about the minimum download speed that a 3G technology must offer; the term “2.5G” has come into use for technologies like EDGE that offer data at rates comparable to wireline dialup connections or slightly faster.

ARPU Average revenue per user. The amount of revenue generated by the average user of a mobile service. Generally expressed on a monthly basis, ARPU is calculated by dividing the total applicable revenue (e.g., revenue from voice services, total subscriber revenue, etc.) by the average number of subscribers during the period.

Bluetooth A radio frequency communications technology designed for relatively short range communications (up to about 10 meters) between devices such as computers and peripherals, mobile handsets and headsets, etc.

BREW Binary Runtime Environment for Wireless. An application development platform for mobile applications developed by Qualcomm; also refers to the certification and distribution program that Qualcomm administers for BREW applications.

CDMA Code division multiple access. A digital cellular technology that uses the entire frequency band available for each communications session at a single base station, keeping them separate by assigning each a unique code. CDMA is used in Korea, by Verizon and Sprint in the U.S., and by some carriers elsewhere in the world. About 13% of mobile subscribers worldwide are currently on CDMA networks.

CDMA EV-DO CDMA Evolution-Data Optimized. A 3G technology in the CDMA family, offering typical download speeds of 300-500 kbps. CDMA EV-DO Rev A increases typical download speeds to 450-800 kbps, and is sometimes referred to as a 3.5G technology.

CDMA2000 1xRTT

CDMA Radio Transmission Technology. A 3G technology in the CDMA family.

Direct to consumer

Sometimes abbreviated as D2C. In the mobile context generally refers to the sale of content and application directly to the consumer, without going through the mobile operator’s sales channel. Nokia’s Ovi program is an example of D2C marketing.

EDGE Enhanced Data Rates for GSM Evolution. A data communications standard in the GSM family; it is sometimes referred to as “2.5G” because its typical download speed of 120 kbps is between GPRS and true 3G technologies like UMTS.



Generation In the context of wireless mobile communications, used to refer to more or less distinct stages of technology with evolving network data speeds. “First generation” refers to analog mobile communications. “Second generation” uses digital technology, and supports typical data rates of 9.6 or 14.4 kbps. Enhanced second generation technologies like GPRS are sometimes referred to as 2.5G, and support 56-128 kbps. “Third generation” (3G) supports data speeds of 144 kbps and higher. 4G is being discussed, with multi megabit data rates, but the term tends to be used somewhat loosely.

GPRS General Packet Radio Service. A data communications standard in the GSM family; it offers typical download speeds of 56 kbps and is considered a 2.5G technology.

GSM Global system for mobile communications. A digital cellular technology that uses time division multiplexing (TDM) to assign different time slots to different communications sessions at a single base station. About 86% of mobile subscribers worldwide are on GSM networks.

HSDPA High Speed Downlink Packet Access. A data communications standard in the GSM family; it is sometimes referred to as a 3.5G standard, since it offers download speeds of 1 Mbps and higher.

i-mode A packet-based mobile data service developed by NTT DoCoMo, used by other operators around the world.

Interactive voice response

Sometimes abbreviated IVR. A process in which a user’s spoken words and keypad entries are used to conduct a mobile transaction.

Location-based information

Information in which either the mobile user’s location or the location of a point of interest or both are critical elements. Examples include turn by turn driving directions, restaurant and entertainment information keyed to the user’s current or projected location, and traffic updates. In some cases the mobile users input current location and/or destination manually (for example, by entering a zip code); alternatively, the handset or application can automatically detect the location, typically either through GPS capability embedded in the handset or through cellular tower triangulation.

MNO Mobile network operator. A company that owns and operates network facilities to provide mobile communication services to individual and corporate customers (e.g., Vodafone, AT&T, NTT DoCoMo). Compare to MVNO.

Mobisode A short video segment created or re-purposed for delivery on a mobile handset.

MOU Minutes of use. A common measure of the traffic volume generated by a mobile user. Generally expressed in minutes per user per month.

MVNO Mobile Virtual Network Operator. A company that provides mobile communications services to end users over facilities owned by an MNO. MVNOs may own and operate some of the network assets required to provide services, or they may simply market services and provide customer support. Virgin Mobile and Tracfone are examples of MVNOs.



NFC Near Field Communication. A very short-range (1-2 inches) radio frequency communications technology used most frequently in card-reading applications (e.g., transit passes, “contactless” credit cards, mobile phone payment systems).

ODM Original design manufacturer. A company that designs and manufactures mobile phones to an operator’s specifications, typically for sale under the operator’s brand name. Flextronics and HTC are examples of handset ODMs. Compare to OEM.

OEM Original equipment manufacturers. In the mobile phone world, the term is typically applied to firms like Nokia, Samsung, Motorola, and Sony Ericsson that design and manufacture handsets that are predominantly sold under the firm’s brand name, although they may be co-branded with a mobile operator. Compare to ODM.

Off deck See off portal. Off portal Refers to any channel of delivering content or applications

to a mobile user that does not involve the mobile operator. On deck See on portal. On portal Refers to any channel that relies on the mobile operator to

deliver content or applications to a mobile user. Over the air Delivery of content and applications directly to the mobile

device using the operator’s mobile network. Compare to sideloading.

Porting Modifying content or an application designed for one platform so that it will run and display properly on another.

Postpaid A payment system for mobile phone use in which the consumer is billed periodically, typically monthly, for mobile phone usage incurred during the preceding month. Postpaid customers generally are on one- or two-year contracts. Compare to prepaid.

Prepaid A payment system for mobile phone use in which the consumer pays in advance for a certain amount of talk time and/or data usage. As the initial credit is used, the consumer can “top up” the account by making additional payments. Prepaid accounts generally do not require a contract. Compare to postpaid.

Premium SMS A way to use SMS communications to generate payment by the mobile user. Typically, a premium SMS message will carry a special rating code that alerts the mobile operator to add the amount of the transaction to the customer’s bill.

Quick Response QR. A two-dimensional bar code used primarily in Japan. Initially used in industrial parts tracking, QR codes can be used to disseminate mobile content. A mobile user takes a picture of the QR code, in a magazine ad, for example with a camera phone. The phone decodes the content and initiates the appropriate action.

Short codes Short phone numbers that, when sent an SMS message by a mobile device, cause a pre-programmed response, such as recording a vote on a reality TV show or sending users a ringtone or other digital content.

Sideloading The practice of downloading content to one device, such as a PC, then transferring it to another device, such as a mobile phone.



SMS Short message service. A system for sending and receiving short text messages on a mobile device. Synonymous with “text messaging” or “texting.”

UMTS Universal Mobile Telecommunications Standard. A 3G data communications standard in the GSM family; it offers typical download speeds in the range of 220-320 Mbps.

Walled garden Refers to the practice of a network provider allowing a subscriber to access only content and applications offered or authorized by the provider.

WAP Wireless Application Protocol. A set of specifications that allow mobile devices to access the Internet.

understanding the mobile ecosystem

Business

mobile distribution

mobile environment

mobile opportunity

mobile devices

mobile handset

mobile phones

mobile advertising

mobile content provisioning