October 3, 2007

a win-win end to the dumb pipe

A recent study forecasts mobile advertising revenue will reach $14.4 billion by 2011. That is an astonishing 10 times greater than the current $1.4 billion in only four years!

Looking more deeply into the study (by Strategy Analytics), however, should send shivers down the spines of wireless carriers. Over three-quarters of the $14.4 billion will never touch the carriers’ income statements. Forty-eight percent will go to Web content providers and another 28 percent will go to search services. That’s how you spell “dumb pipe!”

In previous commentaries I’ve opined on this issue. In this edition it’s time to surface some ideas for dealing with this issue.

Of course wireless CEOs know the dumb pipe problem exists. If I’ve heard it once, I’ve heard a thousand times, “I won’t be commoditized like my wired brethren.” The response has been the so-called “walled garden” where consumers are encouraged (some would say inhibited) to use only services on the carrier’s deck. It has worked thus far, but the walls are crumbling. IP is a “get out of the garden free” card. Once a mobile subscriber goes to the Web the carrier is commoditized into a pipe.

Call it the “bloodline curse” for wireless carriers. They come out of a regulated common carrier background where the consumer paid a monthly fee for the phone to deliver content (someone’s voice). Contrast this with the heritage of the cable TV companies and it’s possible to understand why cable MSOs have a dual revenue stream. Cable MSOs make money off the delivery of someone else’s content through both a subscription fee and the sale of advertising into that content. Demanding the ability to sell ads in a national feed comes from cable’s TV broadcasting roots where local affiliates would get time allocated to sell ads within the ABC, CBS, NBC, etc… feeds.

Now, of course, wireless carriers have begun selling ads within their walled garden. But, while that is better than nothing, it isn’t the big opportunity. Wireless carriers need to get the same kind of ad sales capability as cable MSOs. Why is it that CNN, for instance, willingly gives cable companies two minutes worth of ad time every hour but shuts out mobile carriers from selling ads on CNN mobile? If it is a successful model for high-priced television production, why isn’t it a workable model for the less-costly-to-produce mobile Web content? More importantly, why aren’t wireless carriers insisting on it? I’m not suggesting that wireless carriers start hijacking mobile content and inserting their own ads. But the technology exists to download, for instance, a female-oriented ad to a phone registered to a woman, or a location-based ad, and to insert it on command into the mobile Web site. All that is lacking is the resolve to establish the business relationship to permit this.

All this can be accomplished within the bounds of Net Neutrality as well. It’s not about access to the network, or some kind of preferential service; it is about the use of pre-existing carrier-owned information in the network. If a wireless carrier could offer a content provider demographic or location information (or billing services for a purchase, for that matter), why wouldn’t the content provider take access to that information as a part of a business deal that also gives the carrier access to a defined number of ad insertions? Google CEO Eric Schmidt says that a mobile Web ad is worth twice that of a wired Web ad because of its potential for targeting the consumer. There is enough opportunity in that 2x number for both the carrier and the content provider to find a mutually acceptable business arrangement.

Allowing Web content companies the ability to access the targeting power of the mobile device while allowing the wireless carrier to create ad revenue within that Web content is a win-win end to the dumb pipe. But the window of opportunity will be closing rapidly. If wireless carriers want to see more of that $14.4 billion in mobile advertising they need to act now.