Wireless Content: Path to Prosperity or the Poorhouse?

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Prospects for profiting from digital content look grim. In the past, content purveyors could pursue two generic strategies: sell subscriptions and/or sell advertising.

Since Web advertising's promise has faded—in 2001 Web advertising was down 11% and Yahoo!'s ad revenues shrank 15% in the first quarter of 2002—many content providers are pursuing the alternate path, by instituting subscription fees for content that users take for granted as free. And, while sites like consumerreports. com and wsj.com have already begun to experience success, many consumers still say that they have no intention of paying for digital content.

Despite this gloom, some potentially good news could free content executives who find themselves trapped between the Scylla of advertising and the Charybdis of subscriptions. The emergence of wireless networks and the popularity of various hand-held devices suggests a third way—delivering content to people on the move via wireless content. Early experiments suggest that wireless content could offer another path to digital content prosperity.

View From The Platform
Consumers are gobbling up wireless content with enthusiasm. Neerav Berry, vice president, marketing, and co-founder of Cellmania, a wireless content billing and search software vendor, estimates that 5 to 10 million U.S. citizens actively use wireless content services. Berry says, "Demand for wireless content in the U.S. is growing at 75% per year. The most popular areas are chat, mail, and adult content."

And the wireless industry is steadily overcoming many of the obstacles to satisfying this growing demand. According to Berry, "U.S. consumers are Internet-savvy and want access to content when they are on the move. Handset makers are improving keyboards to simplify wireless content data entry and retrieval. Wireless carriers are beginning to use a direct-billing option" in which the carriers share revenues with content developers. He also believes that wireless content carriers' transition from circuit-switched to packet-switched services will improve the customer experience. The transition from circuit-switched to packet-switched networks could improve service for consumers. Circuit-switched charges for network connect time, while packet-switched charges for data transmitted.

Scott Ellison, program director of Wireless & Mobile Communications for consultant IDC, agrees with Berry, noting that "Even as an industry analyst, I am impressed with how well content is presented on this new generation of wireless devices."

In Europe, where short-messaging service (SMS) is extremely popular, teenagers receive prepaid monthly wireless calling cards from their parents. According to Steven Spencer, chief technology officer of Screaming Media, a wireless software company, "As teenagers reach the limit of their calling cards at the end of the month, they switch from using the more expensive voice calling option billed on the basis of time to the cheaper SMS service, which charges for the amount of data transmitted."

Wireless carriers, such as ATT Wireless, Sprint, and Cingular Wireless, have invested significant amounts, financed largely by debt, to build packet-switched networks. These so-called 2.5G networks charge on the basis of data usage and offer consumers the added benefits of sending data at faster rates and being "always on."

Walls, Gardens, and Ring-Tones
Wireless carriers offer walled- and open-garden versions of the basic service. The walled-garden services limit consumers to the content supplied by 50 to 100 content providers with which the wireless carrier has contracted. Walled-garden services include content, such as news, games, entertainment, banking, stock trading, and access to AOL and Yahoo!. The open-garden approach offers consumers access to information on other service providers' networks coupled with a search engine that helps consumers find information on a topic of interest.

Some carriers, most recently Cingular Wireless, have introduced premium wireless content services. The premium content includes games, downloadable ring-tones, directories, secure chat, restaurant guides, and weather.

Premium wireless content services emulate global wireless content leader, NTT DoCoMo [see sidebar], by sharing content revenues with content providers. The direct-billing option applies premium content charges to the consumers' monthly bill. Typically, wireless carriers keep between 20% and 30% of these charges for themselves and pass the balance along to the content providers.

Content Providers' Perspective
Not all content providers participate in such direct-billing deals. While some Air2Web clients get revenue splits, other content providers like Sportsline and Tribune Media Services, rely heavily on advertising. And a few, like i3Mobile, rely solely on subscription fees.

Sportsline, an Internet sports content provider, generates wireless content money from advertising, not subscriptions. Andrew Sturner, president of corporate and business development for Sportsline.com, Inc., boasts that 10 million people access Sportsline.com's content. He says, "Most carriers are just beginning to penetrate the market for wireless content. Carriers like Nextel, AT&T Wireless, and Cingular Wireless showcase their wireless content services by advertising to our subscribers." Sturner notes that Sportsline offers consumers free wireless access to news and sports scores. When next generation networks go into operation, however, Sportsline may develop paid wireless content.

By contrast, i3 Mobile, a wireless content service provider, has introduced a subscription-based service. i3 Mobile's Pronto service launched in April 2002. According to John Lack, president and CEO, "We charge consumers $19.95 per month for wireless access to information. About 30% of our calls are for enhanced directory assistance: ‘where's the nearest New Balance store?' Another 30% is basic fact checking: ‘How many dimples are on a golf ball?' Ten percent of the calls are for driving directions: ‘I'm getting off exit seven on the Long Island Expressway and want directions to the nearest Wendy's. The final 10% is for airline, hotel, and train reservations."

According to Lack, i3 Mobile is on track for 5,000 subscribers by the end of the first quarter of Pronto's operation. He believes that speed of information and responsiveness are key to wireless content's success. He says, "We answer consumer questions in 15 to 30 seconds through whichever means is fastest—a voice response unit or a person."

Like Sportsline, Tribune Media Services (TMS)—a provider of information and entertainment for print, electronic, and on-air media—uses wireless to expand brand awareness. According to Fred Kopplow, manager of business development at TMS, News & Features, "The wireless industry focuses on brandable assets like JUMBLE, which is seen by 70 million daily readers and appears in 600 newspapers. Through wireless, we give consumers another way to play their favorite game." Kopplow notes that wireless content earns money for TMS in three ways—a flat fee, a usage-based fee, and advertising.

Air2Web, a vendor of technology to get wireless content to consumers, develops some of the most innovative wireless content strategies. Sanjoy Malik, Air2Web's founder, president, and CEO, says, "Sports fans need instant information. For those interested in the PGA Tour, we developed a wireless application that provides the location of golf balls, players' shots, their scores, and how much money they won." The company has also developed an application for people participating in sports fantasy leagues to trade players and an application for the Weather Channel that provides severe weather alerts and Doppler radar images on phones with color screens. While people do not pay extra for much of this content, Air2Web developed a wireless application for UK citizens living in the U.S. who pay about seven dollars a month to get live British club football scores.

The Long and Wireless Road
Many in the industry believe that wireless content could become a significant opportunity for content providers. With consumer adoption growing at a 75% annual rate, content providers have an attractive array of pricing strategies from which to choose—advertising, subscription, or carrier revenue splitting. It remains to be seen which of these options will generate profit for content providers, but it seems that wireless might offer another path to content profitability, if the timing is right and the essential infrastructure and content compelling enough to want on the road are in place.

SIDEBAR: NTT DoCoMo's i-mode Service
NTT DoCoMo's i-mode service leads the world as its most profitable wireless data service. Since its launch in February 1999, i-mode has signed up 30 million subscribers, who contributed $2.8 billion in revenue to DoCoMo in the year ended March 31, 2001—an 840% increase over 1999. DoCoMo posted profits of $3 billion, a 45% jump from 2000. But DoCoMo hit hard times in 2002.

Takeshi Natsuno helped DoCoMo launch i-mode. Natsuno believes that slow technology beats no technology (especially if it's easy to use), and that reliance on ads makes no sense. Instead, Natsuno's i-mode charges subscription fees and forms partnerships with content providers that can also earn revenue by offering data tailored for a tiny screen. "Telecom people only think of launching services unilaterally, never with partners," says Natsuno. "That doesn't work on the Internet."

i-mode users pay about $2.65 a month to access entertainment sites, such as music and animation downloads, services that locate the nearest karaoke bars, and the best windsurf beaches. DoCoMo has 2,000 content providers who charge $1 to $3 for services, such as music and horoscopes.

With its success in Japan, DoCoMo decided to expand globally and to upgrade its technology. DoCoMo spent $9.8 billion for a 16% share in AT&T Wireless and $4.5 billion for 15% of the Netherlands' KPN. And DoCoMo plans an $8 billion investment in its 3G service through 2005.

By 2002, it became clear that Japan's seven-year cell-phone boom had ended. Shipments of new handsets, which began slipping in June 2001, plunged by 29% in 2001's final quarter. New subscriptions dropped by 17% in the year ending March 31, to 8.1 million, and Morgan Stanley Japan predicts they will fall 30% more in fiscal 2002. While DoCoMo acknowledges that the period of rapid growth is over for Japan's cell-phone business, it anticipates stable growth.

The slowdown spells trouble for DoCoMo. i-mode subscriptions have fallen from an average of 1.9 million monthly in April 2001 to under 500,000 in February 2002. By April 2002, DoCoMo's global expansion faced serious problems. Glitches in its 3G system in 2001 forced DoCoMo to delay its rollout by four months. The network, offering a download speed of up to 384 kilobits per second, does not work with DoCoMo's existing network, so subscribers must buy new handsets, which can cost $400.

DoCoMo missed its target of having 150,000 subscribers to the 3G service by the end of March 2002. It now has a mere 70,000 subscribers. Analysts blame spotty coverage and a $75 monthly average cost just for data service—as well as the short battery life of 3G handsets. DoCoMo will have to write off about half of the $13.5 billion it spent on its stakes in KPN Mobile and AT&T Wireless.

Now DoCoMo faces harsh competition from Japanese wireless data providers KDDI and J-Phone. J-Phone, which should pass KDDI as Japan's second largest carrier, has attracted customers with its camera phone, which lets users send photos via wireless email. The corporate services market also enjoys significant profit potential. Japan Communications now provides high-speed data service, accessible from wireless laptops, at a cost of $570 for a year of unlimited use. For years, DoCoMo has set the pace for the global wireless industry. Japan's new winners may be those who can quickly chart a new course.