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3G and Mobile TV: A Smash Hit?

[Note: This article was originally written in the summer of 2006. Funny enough, not much has changed and the arguments are still very valid]

Taking a look at the latest press articles release about mobile TV and 3G, you may wonder what exactly the status of 3G, and particularly mobile TV is.

The International Herald Tribune wrote on July 30 [2006] that most people still use their phones as they did in 2000, and that 3G gains are “modest”. So far, only 38.6m users in Europe are on 3G, less than 6%, and reports have been written saying most 3G owners are not even aware that they have a 3G phone, and those that do complain that the service is difficult to use and too expensive. Recent panel discussions and presentations at Mobile Content World described mobile TV is a “dead duck” and complained it was near impossible to find money for quality productions.

While several articles back the IHT’s view, there are equally articles that show encouraging signs. IDC’s press release from July 25th for instance, predicts that Mobile TV will be a key service in the coming years, and similarly 3 Italy reports good numbers on the take up of mobile TV, saying that 111.000 customers signed up in six weeks, after introducing it right before the World Cup (interesting but perhaps not relevant comparison: ESPN mobile only signed up 30.000 subs in 6 months and are now shutting down – you be the judge of that one). Also, Vodafone claimed that mobile TV is more successful than ringtones (NMA, 21/9/06).

No doubt the market is flooded with optimistic forecasts from service and content providers about the take up of multimedia services. And no doubt the forecasts will be flat out wrong in the short term (although personally I believe that long term we will hopefully all have underestimated the potential). Numerous articles have attempted to explain why the take up has been so limited, sighting everything from battery life to data charges and poor services.

The role of the human mind

In the end though, it comes down to behavioral science. Studies show that new products fail at the rate of between 40% and 90% depending on the category (Source: HBR, June 2006). In this mix is an impressive array of new products, whose designers were convinced they offered massive improvement to the consumer and would sell like hot cakes. Some examples include the Segway and TiVo.  What businesses (and our industry in particular) often fail to take into account are the psychological costs associated with behavior change, which is tied to a basic premise: People irrationally overvalue benefits they currently possess relative to those they don’t.

A study on irrational economic behavior released in 2002, show that people making choices have four characteristics:  1) People evaluate the attractiveness of an alternative based not on its objective or actual value, but on its subjective, or perceived value;  2) Consumers evaluate new products or investments relative to a reference point, usually to a product they already own; 3) People view any improvements relative to this reference point as gains and treat all shortcomings as losses; and 4) Losses have a far greater impact on people than similarly sized gains (“loss aversion”).  For instance, most people will not accept a bet in which there is a 50% chance of winning $100 and 50% chance of losing $100.  The gains must outweigh the losses by a factor of between two and three before most people find it attractive.

What does this mean for the take up of 3G services?  For starters, if for instance 3G phones are more clunky (compare the V3 to the V3x), you will almost certainly get an aversion to switch because the loss in “coolness” factor far outweighs services that are as of yet unfamiliar to the consumer.  Studies have shown that people demand two to four times more compensation to give up products they already possess (i.e. a trusted phone that they know how to use) than they are willing to pay to pay to obtain these items in the first place.  I.e. deep subsidies of handsets may be required for quite some time to get people to switch.

Another interesting bias is what is called the Status Quo bias. Economist Jack Knetsch did an interesting experiment: A group of students were asked to choose between a nice coffee mug and a large bar of chocolate.  A second group were given a mug, and shortly after asked if they wanted to exchange it for chocolate.  The third group was given chocolate, and much later asked if they wanted to exchange the chocolate for a mug.  Of the students given a choice at the outset, 56% chose the mug and 44% chocolate, i.e. a fairly even split. So logically there should not be any preference to what to pick.  However, in the other groups, only 10% of the students wanted to exchange their products.

Most people are not aware of this bias, however it certainly has clear implications in terms of enticing people to switch to 3G.  People have gotten used to a phone and how it works, they have their contact list on it, and they have gotten used to a set of content services. Asking them to give this up and try something new is quite the challenge if the perceived value is not present.

The problem gets accentuated when you consider that companies tend to be biased in favor of new products, and are keenly aware of the shortcomings of existing products (i.e. slow connections speeds, poor screens, no/little multimedia capabilities etc). Studies have shown that executives overvalue the benefits of their innovations by a factor of three (and are similarly not aware of this bias).  It is very difficult to ignore what we already believe to be true.  Therefore, we will for instance overestimate the probability of someone solving a puzzle if we already know the answer, and we expect others to be better at predicting a company’s earnings if we know that number – often referred to as “the curse of knowledge”.  Why wouldn’t people want to watch TV on their mobile? It surely is the coolest thing around? No doubt the industry thinks this way, but the challenge would again be to create compelling services combined with the right marketing messages in order to entice adaptation.

Consumers tend to overvalue the existing benefits of an entrenched product by a factor of three as well, which means the ‘gap’ results in a mismatch by a factor of 9.  Therefore, in order to successfully migrate people to 3G, our industry is tasked with the challenge of introducing a high level of product change, while minimizing behavioral change.  This creates an axis of four identified types of innovations (Source: John Gourville, HBR, June 2006):

.                                           Low degree of            High degree of
.                                           Product change          Product change

Low degree of                   Easy Sells                    Smash Hits
behavioral change
required

High degree of                 Sure Failures               Long Hauls
behavioral change
required

Applying this to the mobile industry, it certainly explains why video calling is a ‘Long Haul’, i.e. it is a huge leap in technology, but requires a massive change in behavior. Operators who are waiting for huge revenues from video calls had best be patient.

Where do products such as Mobile TV fit in?  Is it a Smash Hit? Clearly, the tendency in our business would be to think of mobile TV as a huge product change to using 2.5G services.  However, this is where a thorough analysis of the value proposition to customers is needed.

Value is defined as the benefits you receive over the price you pay for those benefits.  The benefits for a product are different for each person for the same product. For instance, getting World Cup goals sent to your phone for some is the benefit of being up-to-date while traveling, whereas for others it could be to fill the appetite for showing what a fan you are for others.

If we need a 10x improvement in order to convince customers (i.e overcome the ‘gap’), it is pretty clear that getting access to MTV, E!, the Comedy Channel or any other existing TV channel on your phone, when you much easier and more cheaply can watch and switch in the comfort of your home, is likely not much of a value proposition to go by.  Operators tendencies to go with trusted brands is an easy way out, and may doom mobile TV to end up in the Sure Failure category, as switching to 3G may require substantial behavioral changes, while the value of what is offered is low.

So is 3G and mobile TV doomed?  Luckily the industry consists of highly innovative and very smart people. Steps can surely be taken to overcome the consumers’ resistance to adapt to the new 3G world.  There are a number of steps that can be taken can be taken to minimize resistance, and force the adaptation of new services.

Increase the Value

One way to overcome the resistance is to make the relative benefits so great, thereby increasing the value, so that they overcome the consumer’s overweighting of potential losses.  As the World Cup showed, when the desire to get information that in this case had an immediacy and urgency to it, offering 24/7 access via your mobile as a way to make sure to never miss a goal was very attractive to the 111.000 Italians.

Other ways to entice people to sign on is to make sure that what you see on your mobile is exclusive to that channel, and offers something different, more refreshing than what you see on your regular TV.  While you can get away with showing somewhat poor quality programming on TV in 30 minute segments, because people will gladly flip channels and still come back for the good stuff later, on the mobile the user is likely to be much less forgiving of lower quality or non-relevant programming.  Therefore, providers must make sure to launch targeted and relevant channels and realize that one channel cannot appeal to all audiences. When your window to impress is small, you should target content for a specific audience and keep them engaged.  This is one of the reasons why our firm changed our strategy for our programming bundle in our “Overloaded: fun everywhere” channel.  Instead of appealing to a broad audience, we have narrowed down our offering to lifestyle and entertainment for the young adult.

The common factor in any value equation is that the price needs to be at an acceptable level for the equation to be positive.  This refers both to substantial need for cuts or flat rate data charges, but also avoiding insane schemes by portals charging criminal amounts for poor benefits.  How anyone can get away with charging $6/week for access to 20 second clips of songs that you can buy for $1.99 for full track, like the case is for instance in Australia, simply boggles the mind.  It simply is a value proposition that does not compute and is doomed to fail.

Shut down the old

Given that operators and service providers in perfect harmony team up to create compelling, unique and enticing mobile TV offerings, how else do you get people signed up? Shutting down the old is another alternative.  Hutchison in Australia cancelled the CDMA network, and certainly got people to switch in a hurry.  And although widely criticized for it, Trujillo of Telstra’s decision to shut down their old network and ‘force’ them to switch to 3G makes perfect sense in the context of speeding adoption.  Other less drastic measures could be to switch handset subsidies from 2.5G to 3G handsets.

Minimize resistance

Debated time and time again in the industry, is the need to make things simple for the user.  This of course is needed to reduce the degree of behavioral change required to switch to 3G.  There are multiple examples of clumsy handling which really inhibits behavioral change. Using personal experience, some of the issues I faced in switching to 3G:

* Not being able to browse: Blocking browsing outside of the network (either by settings on the phone or by charging ridiculous amounts for off-portal data roaming) is a sure way to ensure that nobody would want to migrate to 3G.  I have had a 3G phone for a year, and only learned 2 months ago that I can adjust the settings to roam off the operator’s portal.  Not having access to my favorite wap sites was a huge negative for me.
* Not owning games:  Suddenly some games were only available to rent, not buy. I prefer buying, but with my operator at the time, this was not an option (they have since switched).
* Keeping my phone numbers: Always an issue in switching. The more phone numbers I have stored on my old phone, the less inclined I am to give it up. Offer online storage of my number of easy transfer, and this is no longer a hindrance
* No MMS roaming:  I like to send pictures via MMS to friends and family overseas. The operator I chose does not allow this.

Why did I switch to 3G and this operator?  It was actually not for work reasons, rather this operator was the only one willing to give me a subscription as I had recently moved to Australia and did not have permanent residency.

Another way to increase adoption, which is widely followed by some, is to target those consumers who prize the benefits they could gain from switching to 3G or only lightly value those they would give up.  This means targeting those that switch phones frequently either because they are bargain hunters (and you need to subsidize the handset), or because they want to keep up with the latest trends.  Motorola certainly proved with the Razr that if you make it a fashion statement, people will switch. At the moment though, there is unfortunately very little cool factor with 3G phones, and showing off some 3G services can get you classified in the nerd category rather than the cool category, which is a sure killer to reach certain target groups. Again, if the content and services were so compelling that people would enjoy showing off something on the phone in the same way that people enjoy sending clips to each other on email, you would certainly reach a very influential base of users.

Where next?

It may seem like a difficult task to increase 3G adaptation and specifically drive mobile TV usage. Besides the usual issues of battery life, network capacity, lack of roaming capabilities and data charges, the human psychology factor is possibly the biggest inhibitor in the mix.  Only when the industry can provide substantial improvements over existing 2.5G offerings, and make it painless to switch, will 3G and 3G services take off.  We are clearly not there yet, but I certainly have not given up hope…

Posted in Mobile Entertainment.

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