Taipanway’s Weblog

The mobile world is quickly shaping up to be a battle between on and off carrier!

Since before joining Xingtone, back in my days at Island Def Jam, I have always believed in a very basic concept:  New Media is no longer NEW.  At the time, I was specifically talking about merging New Media into the marketing group - but that basic concept has led much of my thought process in the convergence of content and technology.  In the wireless world, I maintain that while the P&L of wireless is distinct from other distribution vehicles its growth will be limited (hard to say with a 4 Billion dollar mobile content - but you heard it here first) until it is combined into the greater whole.

Looking throughout the history of distribution businesses - from Morse code networks (tongue in cheek - but possible), to radio, to TV, to Cable, to the Internet, to broadband, and finally to wireless; ‘pipes’ have always wanted to own/control the content flowing through its networks.  Pipes have always fought against being ‘dumb’ and always wanted to add a competitive advantage with content.  Time and time again however, this has failed.  That is not to say that at certain times and for certain specific areas it can not work, it means that the business of content and distribution are not only different, but completely opposite. 

The basic concepts above suggest to me the need for an expansion of the off-carrier mobile internet (if you do not know what off-carrier is - read my previous blogs from www.taipanway.com).  I compare this concept to AOL.  Back in the day, when people were enamored with the Internet in any form they could find it;  when 28.8 KBPS was fast, and when getting sports scores when you wanted them was all one could hope for, AOL was king.  AOL did not create the internet they just made it easy and bite-sizable.  However, the easier the internet got for AOL subscribers, the more they demanded.  Sports scores were no longer enough, they needed ESPN sports scores.  As AOL got bigger and their subscriber base got more diverse they had a choice:  engage in content deals with every possible partner (a bit unlikely) OR put a web-browser into AOL.  AOL obviously picked the latter.

Now the reality has in large part led to their ill-fated acquisition of Time Warner - because they now ‘opened’ up their walled garden.  Their value was limited and they needed content to differentiate themselves from the Earthlinks of the world.  However, as users became more sophisticated, when typing www.anyword.com was no longer a challenge, the fact that AOL MAY have some additional content was not enough of a hook.  Combine into this equation, a gradual (and in some cases sudden) move from dial-up (where AOL had a significant competitive advantage) to broadband (where they had none) and we begin to see a clear picture.  In essence, overnight, AOL went from a connectivity company to a content company.  The jury is out if AOL can thrive as a content company (Live 8 may help) but the facts are clear that AOL as both a content and a distribution company failed miserably.

A short story: In Atlanta about 2 years ago, I was at a cocktail party for the MEF (a mobile networking group) when they elected/announced their new leadership.  The group was a combination of carriers, content owners, handset manufacturers, etc..  I remember vividly when the new chairman got up and made a short speech which basically said; ‘as the tide rises we will be partners and rise together’.  I turned to the people I was with and said; ‘This sounds a lot like socialism’.

As the tide has risen, and everyone is making money, there are no problems, HOWEVER, we have already seen a number of problems in the relationship within the value network of the mobile world and I hypothesize that this will continue until a critical path that leads to a completely open mobile network.

A few examples:

1)       The push back from Verizon against Motorolla and Nokia and their embrace of Sanyo, Samsung, and LG - all to push the Verizon brand ahead of the others.

2)       The aggregators getting squeezed BADLY from the switch from polys to master tones.

3)       The inability for carriers to work within the time frame of the content business. 

T-mobile has recently opened up completely making google its home page.  DoCoMo allows anyone to sell/deliver content to their customers taking a very un-American 11%; so the question is: why is there even a debate and what comes next?

One simple answer is greed.  Why not make money on three areas of the market rather then one?  For a little background, carriers make money in three ways:  1) Data 2) as a billing company 3) as a content retailer.  There is nothing wrong with the triple dip and as an Ayn Rand capitalist, good for them.  However, (and see my previous post on anybrands…) this model is greatly limiting growth in the mobile world.  Is it not obvious that the carriers would make MORE money if they incentivized 3^rd parties and content owners by taking a smaller share of the revenue?  Would Visa and MC make more money or less if they raised their rates from 2.2% (+$.30) to 35% or would people use cash instead.  Would porn and gambling make money for the carriers if they ‘opened’ their network or would users shun what they have embraced on-line.  I think it is fair to say that it is NOT greed that drives the carriers decisions.  So what can it be….

Control!  It is the same reason that the music companies railed against Napster back in the day.  They did not seriously consider a revenue arrangement because ultimately it was not about money it was about control.  Another little story:   Back at IDJ, Rhapsody came to our offices to present to the executive team.  They showed us the service, the new hardware to connect the service to a stereo etc.. The IDJ team was pretty impressed until Rhapsody made a tactical error.  They began showing off how they ‘broke’ an artist by marketing her to their listeners and by giving her placement on their front page.  You could actually hear the air being sucked out of the room with the company thinking - well what do we do if companies like Rhapsody can move the needle with or without us.

Anyway, control is more important in this thinking than good business - which is obviously counter intuitive.  Thankfully for us the user, and for me the CEO of Xingtone, open networks will continue to be driven forward.  Why am I so confident?  Because consumers demand it! Someone at Verizon once said to me that their closed network works while their voice service was so much better than other companies - however, when a user starts buying on data (because eventually voice will be a commodity like a dial tone) open networks will win.  To say this stronger, the carriers will begin competing directly with IR, Cable, Bluetooth, Wi-Fi, etc.. Each of those technologies in their own way are ‘open’ and they are not controllable.  Yes, Verizon can cripple a couple more Bluetooth phones - but really, for how long? 

To stay competitive and to drive a market, a service provider must adapt and answer to what their consumers want.  The carriers, if they like it or not, will have to follow along.  The amazing thing about this - as we the consumer are pulling them kicking and screaming - they will make more money than even they thought possible.

Hollywood (especially the music industry) just does not work in 6 month cycles - it is a 911 culture.

Hollywood is the antithesis of efficiency and pipes are the antithesis of creative.  Do you really want Verizon to be the arbiter of good taste?  A colleague, AJ Peralta, proposed a great analogy: Do you pay your electric company to watch a specific channel on TV?  Of course not!  We have the benefit of electricity  that enables the watching of TV but Con-Ed is no thought leader on entertainment - NOR do they try to be!

This is a short one - like my Apple MVNO. A hypothesis: Warner Music will be bought (in a hostile takeover or otherwise) by a major tech company. Maybe Yahoo or google or MS - I am not sure, but somebody. On paper they are worth a paltry 2 Billion dollars. A drop in the bucket for a company like MS (well maybe not a drop in the bucket). With a huge back catalogue, WMG has tremendous ‘real-estate’ that is an annuity business. A Company can come along, buy them, own the catalogue, spin off the labels, drop the heavy operation load, and ensure that not only will they have great content - but their competitors will have to come to them for a license.

Just a thought - but then again so was the Apple MVNO and now everyone is talking about it….

I am fascinated with the amount of movement in the digital music business. Everyone wants a piece of the pie. The music side confounds me a little in that Apple owns most of the market (by a long way) and the rest are fighting for the scraps. We know Wal-mart is meandering along doing very little and now Target is getting into the business. Soon every major brand will be associated with digital downloads. The same is true in ringtones (if not more so) -

Billboard and Napster are just a couple of the limitless companies and brands trying to ride the ringtone gold rush.  There are a number of different types of companies that are in the market.  Carriers, content owners, aggregators, etc..; all building a P&L to make money.  This new breed however, is an interesting move in the market.  Not unexpected but interesting. 

In the ‘old-world’, the companies in the value network had very unique roles and very specific obligations.  Carriers handled marketing, distribution, and billing.  Aggregators - aggregated and created content and content owners collected money.  With the introduction of Billboard and Napster the marketing is beginning to be seen from other segments.  This is very powerful - in THEORY. 

Let’s talk a little about revenue splits.  These are not accurate for EVERY situation but they are pretty standard in the US.

Digital downloads at $.99 - labels receive $.67 -$.71 the rest is split between Apple and the CC processing.  If you sell one track at a time you lose money or barely break even (rates start at $.09 (up to $.35) a transaction and 1.5% per) - larger transactions (or prepaid cards) defray the initial burden of the per transaction costs.

Mastertones $3 - labels take $1 - 50% of gross revenue.  Carriers want 50% but at times are willing to take 40% - and aggregators take 10%.

Polyphonics - publishers take 8-12% - carriers take 50% and aggregators take 38%-42%. 

Obviously, outside of polys, this is a very tough business.  Having additional marketing companies like Napster or Billboard will absolutely grow the business in terms of hard dollars the question becomes how and who gets paid?  I think one development that this will ensure is a continued move to open networks (see T-Mobile) resulting in carriers opening up their billing AND dropping their rates.  If Coke for example wants to sell ringtones, they want more then 10% margins.  Especially because the carrier has no risk  - why should Visa and MC get 1.5% and a carrier get up to 50%.  It just does not make sense and more importantly it is a constraint against future growth.

With all that said, everyone wants to be in the business of digital music.  The reason is a combination of a herd mentality and marketing 101…..  And once again it is bad for the music industry.  Attatching your brand to a disposable type product that has low margins and potentially high volume is a wonderful loss leader.  It builds brand loyalty and foot traffic (either real or virtual).  Wal-mart used CDs at rock bottom prices to build foot traffic in its stores.  This resulted in Wal-Mart practically owning the record business.  They did not make money on this line item, but you go to Wal-Mart for CDs and you leave with patio furniture. 

Apple is doing the same thing.  By an iPod for $100-$300 and then but these cheap songs that barely pays for the business unit.  In this case it is the exact opposite of the razor blade model.

So a couple of predictions/thoughts:

Apple needs to make some big moves - bigger than the podcasting - they need to open up to WMA or at least open up their own DRM.

Marketing companies/brands will help drive the mobile market and some will actually be successful (though not many of them).

Carriers will continue to open up.

Bobo and P-SMS pricing will be pushed down.

Music will be devalued into a loss leader on the mobile front over the course of time.