Artilium

Friday, January 15, 2010

Can free services provide new revenues for operators?

2009 has been a tough year for most of us, but difficult economic times do tend to help shape technology markets and creative marketing strategies emerge. In an unsure mobile market operators are resistant to large CAPEX deals where the technology bought may not fit the rapidly changing market. To offer new services MNOs can look towards OPEX deals with service or platform providers – but even so will subscribers be willing to pay for new services in full, or indeed at all! Subscribers have already been exposed to free internet services – search engines, video content, news, music, social networking etc. The big question is – can “free” be made to pay for itself, and is this a good model for mobile services?

Obviously “free” has to be paid for somehow and there are established revenue models which tend to fit 3 general categories.

• Cross-subsidies: This is a well understood sales method where the revenue comes from an alternative but normally related and essential source, e.g. sign a new contract and get a free phone, free printer but you must buy the ink refills, etc.
• Ad-supported: Again a well established model where the content is free but will contain embedded advertising. The advertising income obviously pays for the service and is widely used to support media content such as commercial radio and television and for services such as free internet search.
• Up-selling: This is well exemplified by the freeware model used to distribute software. Essentially the basic product is distributed free, but a more sophisticated premium version can usually be purchased. Hence it is sometimes called the freemium model. This is often used by small companies who do not have great routes to retail markets and whose products are relatively unknown. Note that this is different to the shareware model where there is a free trial, but the product does have to be paid for if you continue to use it.

There are many other free models including community based services and open source products. However the revenue models for these can be convoluted or can be largely altruistic where the revenue model evaporates. Therefore, we only concern ourselves with the three above.

To consider if a free model would work for an operator take the scenario of a new MVNO. Free would be a good way to attract new customers but could they profit from such a model. You can make the argument that if they offered broadly similar services to their competitors with no added value or differentiation they would attract very few customers. The differentiator however can be free value added services and if these services are attractive new subscribers will be attracted to the MVNO.

A hybrid cross-subsidies/ad supported model has been tried by new MVNOs in the past. Most notably by Blyk who tried to have a free service (free calls and texts) with the subsidies coming from advertising which their subscribers agree to accept. The initial problem with this model was that adverts were not very targeted so their value to the advertisers was low and it was difficult to support the free model for calls and texts. However, mobile advertising is not yet mature and Blyk is to be congratulated as a pioneer of the ad-supported call model. While Blyk is not a brand other than as an MVNO, its stated aim is to connect relevant brands to subscribers.  Their MVNO in the UK closed about 6 months ago but they are planning to launch in the Netherlands during 2010.

Branded resellers and MVNOs with existing established business that can be enhanced by introducing a mobile channel probably stand most to gain by considering a free model. First consider a cross-subsidy applied to an example of a cable TV service. If there was a mobile channel associated with this company the subscriber might be able to access TV content via their mobile service for free. The benefit for the CATV brand is that they will have revenue from both mobile and CATV. The mobile TV content is free for the subscriber since the CATV subscriptions and mobile call revenues cross-subsidise this. The CATV company has increased overall revenues, the subscriber has a clear benefit by subscribing to their mobile network and the MNO benefits by the brand bringing more subscribers to the network.

Now consider the ad funded model. A brand, say a supermarket, may already have a customer profile through a loyalty and rewards card, so they can leverage this into an advertising model where relevant offers are sent to their subscribers. Advertised offers take the form of discounts and extra loyalty points based on purchases made. The mobile channel allows offers to be sent in a timely manner based on location, shopping history and current context. The service to the subscriber is a way to discount their shopping through discounts and loyalty points – possibly the points can even be used to buy top-up credit.

Finally we consider the up-selling model. As an example, imagine a retailer specialising in contemporary music and related merchandise. By establishing a mobile channel as part of the brand, music clips or tracks can be provided regularly to the subscriber, the genre of music can be adapted to the preferences of that subscriber. If the subscriber wishes to have the complete track or album they would need to purchase this, and they would continue to receive a free but limited service irrespective of their purchases. The purchases would help tailor the service for each subscriber and it is logical that up-selling of merchandise related to the artist of interest would also occur at the checkout phase.

So it seems that “free” could work very well for mobile brands, principally MVNO and branded resellers, where existing business can be enhanced via the mobile channels. The revenue to support the free service is generated by sales which are directly related to the brands normal business in addition to the revenue from the mobile service. In many cases, the free model is likely to be a hybrid model, indeed a combination of all three (cross-subsidies, ad-supported and up-selling) within a business model for branded mobile services seems very likely in the near future.