GLG News by Tarik Fawzi

Implications: - The announcement of new funding by Blyk indicates some investors still see potential in Blyk, despite non-flying results in the UK - The announced deal with Vodafone NL is one of the first wholesale deals for Vodafone in the Netherlands in a crowded MVNO-market, where over 90% over MVNO's are on the KPN network - the planned launch of Blyk in the Netherlands will stimulate the Mobile Advertising market and the turn around of the business model. 

Analysis: Blyk announced it picked up new funding, required for further roll out after launch in the UK end of 2007. Today, Blyk UK has 30,000 customers who receive 217 free text messages and 43 free minutes per month in return for advertising. With this business model, the traditional way of earning revenues from end users is turned upside down. It's the beginning of ad funding services as we know it in traditional media.

Ads are served based on end user profile, thereby limiting waste of advertiser spending as only relevant targets groups, as defined by the advertiser, are being served with an ad.

Blyk suffers from the fact that it start without a base, whereas reach is the number 1 item counting for advertisers. Blyk in specific, and the mobile channel in general, will only become a relevant alternative to traditional media if the end user group is large enough. In the UK, it is not yet.

Blyk moves ahead by announcing launch in The Netherlands, thereby making itself more attractive for international advertisers who want to advertise cross-border. At the same time, the Dutch market has 1/3 of the subs versus the UK market. And it has over 50 MVNO's.......A crowded market place to gain customers.

And of course, the network operators (KPN, Vodafone, T-Mobile) are not sitting still. KPN conducted 2 in-market trials already in 2007 and announced commercial launch of various services in 2008. So has Vodafone.....
Probably they are the players where the advertisers are looking at most as they have the reach....

Focus only at 16-24 will give Blyk a target group in the Netherlands of about 1,7 million customers. All of them already have a provider; 3 network operators and 50 MVNO's are going after them. Will number 51 be successful? Of course, offering free minutes and texts helps for acquisition. But are those customers truly interested in advertising?

Implications: - the investment of both Vodafone and Telefonica in Amobee is another indication there are great expectations of mobile advertising - control of a technical partner however might hurt market growth - Microsoft before invested in Amobee competitor Screentonic

Analysis:

Analysts and market players expect the future might bring some radical changes to the wireless business model. The promise of mobile advertising is based on a few simple principles:
- advertisers are increasingly unwilling to waste advertising money on traditional channels which are not interactive, and to which consumers hardly pay attention. How many consumers drift away when confronted with irrelevant advertising?
- wireless operators have seen ARPU's drop despite the launch of numerous new (data) services the last few years
- consumers are fed up with spam and ubiquitous adverting, where most offers are not fit to their specific needs.

The mobile device with characteristics of tailoring, profiling, penetration, multiple uses per day, location and various channels of communication has the potential to solve the issues of advertisers, operators and consumers simultaneously.

Mobile advertising is relatively new, compared to where internet advertising was 7/8 years ago. But to assume that the mobile industry will grasp 5% of the total advertising spending in a few years time is not such a strange estimate.

A lot needs to be done to realise that: convince consumers to opt-in through giving them incentives; adjusting operator systems to enable advertising through channels as textmessaging and mobile internet; educate advertisers to use a new advertising channel; and tailor ad to the profiles of consumers.

This is were companies like Amobee, Screentonic and MADS come in. They provide ad servers in which mediaplanners can plan campaign through wireless operator channels; The ad server ensure the right ad is sent to the right customer. These companies often offer hosted solutions from which operators can profit through economies of scale.

By investing in Amobee, Vodafone and Telefonica indicate the believe in the future of mobile advertising. Simultaneously they can use Amobee's systems in muliple countries, probably against attractive conditions, and profit from the specific mobile advertising expertise of a specialised small company as Amobee. Also, they could profit from Amobee's deals with other operators. Indirectly Vodafone and Telefonica could earn money on the success of competitors like Orange and T-Mobile, if they choose to use Amobee's systems. However, it could limit Amobee's prospective business with these operators as well.

Implications: - Vodafone, Telefonica and Orange will see increased competition in the Spanish mobile market - this time from a player with a good track record (Germany, Belgium) of working in markets with multiple MVNO's - voice and text messaging prices will drop in the Spanish market hurting margins

Analysis: The Spanish regulator CMT granted Dutch operator KPN 200,000 mobile numbers in Spain. This is a step closer to becoming an MVNO (mobile virtual network operator). The numbers are those which E-Plus Moviles Virtuales, KPN's Spanish subsidiary, will begin to allocate to its customers when it starts up. It is expected that KPN will close a network deal with Orange.

Spain has one of the largest mobile markets in Europe, underwritten by a population of more than 43 million. Strong growth in 2005 and 2006 was encouraged by competition between the three main players, which has driven down the cost of services. The market saw some major changes in 2006. Orange has been able to exploit the resources of its parent company France Telecom to secure the lion’s share of net adds and overtake Vodafone as the number two player. After considerable delays the MVNO market was opened in October 2006, and the emergence of a number of licensed operators in 2007 promises too intensify competition further.

In other markets as The Netherlands, Belgium and Germany the MVNO market has been growing immensely. The Netherlands knows over 40 and Belgium over 30 MVNO's. In these markets, MVNO's are focusing on niche markets, are often no thrills (sales through the internet only) and low costs. It hurt the network operators, even though some of them actively support MVNO's on their networks. KPN has a lot of experience through it's German subsidiary E-Plus, which launched various brands in the German market and successfully.

It will be interesting to see if KPN can copy this success in the large Spanish market, where there is relatively little competition. However, it makes a difference if you don't have a network: for product differentiation an MVNO is always dependent on a network supplier.

Implications: - by closing an exclusive deal with Apple for distributing the iPhone, T-Mobile is opening the door for future lower earnings - an Apple deal is a short-sighted focus on acquisition numbers, but by giving away data and voice revenues to a supplier, other handset suppliers will see opportunities to do the same - the balance of power between operators and handset suppliers will therefore move into the direction of suppliers

Analysis: Deutsche Telekom closed a deal with Apple for exclusive iPhone distribution in Germany, Austria, Hungary, The Netherlands and Croatia. T-Mobile has agreed to give 10 percent of revenue from fixed-line calls and data communications generated by iPhone customers to Apple. Industry sources have told Reuters that T-Mobile will sell the iPhone for EUR 399 in Germany.

Revenues coming from mobile data are growing for wireless operators. Where customers will be continue to use their iPhone from T-Mobile, the coming years, T-Mobile will need to pay Apple increasingly as users will use more data services. As voice revenues are dropping, the relative share of data will increase. A deal as with Apple, will hurt T-Mobile's margins on it's fastest growing business. It seems T-Mobile has been focusing on acquisition numbers: this deal with lead to higher acquisition numbers. Also it will attract customers with a more innovative mindset: these customers are more data driven, leading to higher operator revenues. But again, by given away a part of these revenues, it will improves T-Mobile's revenues but hurt it's margins.

More: by offering a supplier a part of the core (traffic) revenues, T-Mobile is opening Pandora's box. Why would Nokia, Samsung, SonyEricsson and other handset suppliers not demand traffic revenues from operators when they come up with a new fancy handset? Vodafone wisely decided to keep a short-sighted opportunity outside the door for fear of moving the value chain model more in a direction which is advantageous for the handset suppliers. T-Mobile's deal will lead to a dimished role for the operator: a mere distribution channel who is even paying, in stead of receiving....

The absolute pain for T-Mobile will be limited in the short-term: no too many of the total T-Mobile customer pays will be able or willing to buy an expensive iPhone, but it's the long term where the pain will be.

Implications: - further consolidation in the European wireless market - little reason for customers to remain loyal - 3G is no competitive advantage anymore

Analysis: The Times has reported 3 Italy is for sale. This indicates a further step in the European consolidation game. Last month the EU approved T-Mobile buying Orange Netherlands, leaving the Dutch market with three operators versus five until end 2005.
3 started operations in amongst others Italy, the UK, Austria and Sweden in 2003. The focus was completely on data initially. The first results were very disappointing. Only after 3 had switched gears and moved to attractive voice tariffs, the customer base grew. A key learning was that the majority of consumers are unwilling to pay for data services: the content of those services (music, movies, sports, adult, news) can be received at lower prices through other channels. Also handsets gave disappointing user experiences due to limited battery lifetime, small screens, high data traffic and intransparancy in costs. However, those attracted to 3 were in general youngsters and innovators, with higher data usage. Consequently, 3's ARPU's were above marke average. These groups though, represent a fraction of the total consumer market. Today, all operators have 3G networks. The customer bases are rapidly moved to 3G networks, away from 2G. 3's competitive advantage is diminished every day. For high-speed networks customers don't need to stick with 3. Especially in a market like the Italian, where 90% are prepaid customers, there is little guarantee customers remain loyal. Consolidation will benefit the established players: for margins it's better to be in a 3 player market than in a 4 player market.

Buyers should better not pay too much....

Implications: Blyk, led by a former Nokia President, will start operations in the UK offering free mobile services to consumers. They will fund this with advertising revenues. Offering free services could be a threat to wireless operators revenues, but there are hurdles.

Analysis: Blyk has announced launch of it's services in the UK in September. Other countries are expected to follow. Blyk is revolutionary in offering free mobile services to consumers. In return consumers allow advertising on their mobile handset. By definition, opt-in is required. Blyk will focus on 16-24 year olds. This is a relevant target group to advertisers. However, Blyk is in a chicken/egg situation: advertisers need reach and frequency. Blyk can not offer this at launch. Therefore, Blyk will initially bleed, offering free services, but with little advertiser revenues. A lot of advertising will be required to balance mobile services costs. Other operators have the advantage of a large base, which makes it easier to attract advertisers.

The meaning of Blyk is, despite above scepticism, meaningful. Operators have noticed over the last few years, that consumers are just not willing to spend money on new services. And where they do, it cannibalises on other mobile services. Further, voice and text services prices have been dropping for years. Operators need new revenue stream. Mobile advertising might just be the one.

Advertisers are looking for ways to reduce waste on advertising money, direct contacts to end users and interactivity. Consumers are annoyed with non-relevant ads, they want offers which fit their needs. The mobile industry has ways to meet these demands. Offering incentives to consumers to opt-in and building consumer profiles with individual needs, developing mobile channels to send advertiser propositions to the consumers. These incentives could go as far as offering free services, as Blyk is doing. But advertisers remain conservative: it's reach and frequency that count for them.

Implications: The wireless data market in European has not shown any significant revenues streams in the prepaid data market. Europe is more prepaid and more data oriented than the US. Learning from the European experience, AT&T should not be too optimistic about revenues in this market.

Analysis:  European wireless carriers have not been successful to date with data services in the consumer market. On average, voice represents about 80% of wireless operator revenues, text messages counts for 15%, the remainder of 5% being for other data services (picture messaging, downloading of games, music, browsing the web, access to news, weather, sport, adult content, etc.). A significant part of this data chunk is earned in the business segment and the high-end consumer postpaid (subscription) market. The data revenues in the prepaid market are very limited, even though in most European market more than 50% (up to 90% in Italy and Eastern Europe) of the market is prepaid.

Reasons are settings in handsets, capabilities of the handsets, high costs for end users and the fact that those costs are nontransparent. Flat fee propositions are only limited available for the prepaid market.

AT&T should be cautious with expecting revenues in prepaid data: the US market is more postpaid and less data minded than the European market.

Implications: - Vodafone's strategy is to focus on emerging markets - however established markets still represent bulk of Vodafone's revenues - multiplay offers by competition threat existing revenue stream - both to defend this as well as to enter new markets Vodafone moves into the fixed market - more moves by Vodafone in the fixed arena expected in Europe

Analysis: Vodafone has shifted it's wireless gears by focussing increasingly on emerging markets. This can be seen by recent takeovers in India, Turkey and a partnership in South Africa.
Vodafone sees less growth in Western Europe. However, the Western European markets still represent a huge chunk of Vodafone's revenues. In these markets cable players are offering fixed telephony, internet, tv and several have become mobile virtual network operators, making them effective multiplay parties. The same counts for the traditional fixed line operators, stepping into the digital TV business, offering mobile (either as mobile operator of virtual operator) and of course internet. As Vodafone states: customers increasingly want a single communication bill. Where Vodafone doesn't offer digital tv, fixed telephony and internet they will lose mobile customers. The step in the Dutch market, and earlier in Italy, indicates Vodafone's willingness to become a multiplayer. The fact that Vodafone only counts on a few thousand fixed customers however, doesn't imply Vodafone is pushing it with full force. First wait and see if customers really only want one communication bill.

Implications: Alcatel Lucent can profit from it's track record in Europe in 3G networks and application solutions to grasp growth opportunities in the Middle East and Chinese markets. Recently closed contracts with Etisalat and China Unicom underscore this. However, the threat from Chinese domestic players Huawei and ZTE is not to be neglected in the granting of 3G supplier contracts in China.

Analysis: • China is about to start rolling out at least two 3G networks, implicating opportunities for the experienced 3G providers, including Alcatel Lucent.
•At the same time, there are fears for preference for the domestic suppliers ZTE and Huawei
• Meanwhile Alcatel Lucent is closing deals in the Middle East with multinational operator Etisalat as well for 2G expansion; as well as a 120 million dollar deal with China Unicom

Implications: - wireless operators are looking for new revenue channels, of which mobile advertising promises to be one
- Screentonic has multiple operator contact and the appropriate platforms to be a player in this field
- by acquiring Screentonic, Microsoft can leapfrog it's attempts to become more intimate with wireless operators, as it can combine internet advertising experience and advertiser contacts to Screentonic's strengths.

Analysis:  

Wireless operators are facing lower voice tariffs; data revenues have been disappointing for the last 5 years since the promising figures in the beginning of this century. Roaming tariffs will be drastically cut following EU regulation over the next few months. Large carriers like T-Mobile, Telefonica, Orange, Telecom Italia Mobile and O2 are increasingly confronted with new, flexible, niche-oriented, low-cost Mobile Virtual Network Operators.

No wonder, they are looking for new revenue streams. Mobile advertising just might be the one. There are twice as many cellular devices as TV sets; the cellphone is personal and is characterized by a number of characteristics which are promising to advertisers: interactivity, multiple services (voice, sms, picture messaging, portals, notification services, mobile internet, instant messaging and many more), numerous usages per customer per day and with the ability to tailor. Coca Cola believes it will spend more on mobile advertising than on tv advertising in a few years. With high reach, high frequency, lower costs, less waste mobile has the opportunity to effectively compete for the advertiser’s media dollar visavis other media as radio, print, tv, outdoor and even the internet.

Operators need to opt-in end users (for instance by free minutes or a bill reduction) to avoid spam and waste for advertisers. They need to attract and educate advertisers. And finally, they need platforms and applications to make their systems suitable for mobile advertising, for example to advertise to end-users based on their profile and needs.

This is where Screentonic comes into the picture. They have the platforms to allow adding advertisements to mobile service, tailor to profiles and report effectiveness to advertisers. They also maintain strong relations with multiple international brands.

With the acquisition of Screentonic, Microsoft also acquires the mobile advertising contracts Screentonic has with European wireless carriers, where market trials are happening today. With multiple others, Screentonic is amidst negotiations contracts. Microsoft can bring it’s internet advertising experience and tooling to the wireless table. A huge opportunity in Microsoft’s attempts to become more intimate with wireless operators and to play a dominant role in this enormous and profitable industry.

The pitfall? Screentonic is focusing on advertising in portal services. The percentage of users of wireless portal services is limited to – on average – five percent. And the amount of frequent users amongst consumers is less than half of that. And what are advertisers looking for? Reach and frequency…….

The real opportunity is in mobile advertising in those services which are used by most cellular customers, and often used by them: voice, text messaging, voicemail, missed call and voicemail notification. Interesting to see if Microsoft / Screentonic will go for the high-end/low users mobile advertising services, or the low-end/high-end mobile advertising services.

As opposed to some other companies acquired by Microsoft, Screentonic will remain relatively autonomous and not integrate fully.