Mobile Content Revenue Models – Still an Issue

I was recently asked the following questions:

1. What’s the most promising business model for mobile games? Can free and premium models survive together?

2. What’s the impact of mobile on the gaming world in general (will you plug your game-enabled phone directly into the TV, cannibalizing console sales?)

3. Is there major M&A activity on the horizon (Will Hands-on, Glu Mobile stay independent)?

Being an old warrior in the space, having run Europe’s first java portal for mobile games for the A008 back in 2001, I must say I am not overly optimistic.  My two cents:

1. The entire problem with the whole mobile games business is exactly the business model. First, you are in trouble off the bat giving away 40-60% of your revenue for “billing” costs.  Second, publishers are increasingly having to pay for the marketing as well, whether on or off deck.  And middle men are suffering as they are being squeezed in both ends.

To illustrate, and this is the worst case I have ever encountered, and thought the days of these business models were over:  For a game involving video clips, I was offered a 50% revenue share from the carrier, a third party integrator would take another 10% for maintaining a third party site infrastructure, and then to zero rate the traffic, another 25% disappeared in paying for the data charges. So on top of that wonderful 15% revenue share, we were offered if we would like to advertise on the carriers home page for $1000/hour for an app that sold at $3 a pop (where we would receive 15% of that).  This seems like a complete joke, but are actual facts.

As long as carriers control the action because 1) only a single digit % of users ever download something off deck due to discovery being difficult and 2) they have virtual walled gardens with billing charges leaving nothing for what it costs to run a D2C business which requires a lot of advertising — it leaves what we all love(?) and hate: the subscription model.  Yes, while in my experience, a hard core mobile gamer downloads 1-2 games/month in most markets, companies try to charge them $5 up front for the privilege of being a member, and then charge them $5/week for downloading 3 games a week which they know users will never do, and hope users stay subscribed beyond 3 months so they recover the acquisition costs. Great model. Until you run out of subscribers to screw.

With regard to ad support, well, I think the jury is out on that one. The CTRs and CPM rates at this stage are way too high for what is offered, since no players have enough global presence or targeting in their ads to make it viable.  I still believe in the model, but I think advertisers will certainly in these economic tough times pinch on such “fringe” initiatives such as in-game ads until ROI becomes very concrete and measurable. I have yet to see a good ROI case study on this (although luckily more good mobile advertising case studies are appearing).

2. I have argued before (even on CNBC), that mobile gaming and console gaming are fundamentally different – not mainly because of the platform (which certainly differ in screen size and capabilities), but also because of the user value proposition. Mobile certainly has the ability to, and will likely become a good complement to console games or online games, but will never fulfill a hard core gaming need in the same way as consoles and online games. But I certainly believe for games that are of roll-playing nature, the mobile should be a nice complement to check up on your character and complete basic tasks.

3. M&A – well, quite possibly. The longer carriers stranglehold the industry, the more important having a big marketing budget and a strong key account network becomes, and certainly smaller players will suffer.  Deck space on carrier decks have never been about quality, but rather the publisher’s influence. When you run a “240×320 7-Eleven store”, you certainly think very carefully in terms of which chocolate you put at the counter to ensure the maximum returns to you as the store owner.

With regards to the business model though, I have time and time again heard the arguments about the costs element for the mobile operators to charge what they do.  The classic arguments are of course calls to the customer center, where carriers complain that users will always call them instead of the off-deck provider.  I am eager to see if anyone responds and offer the list you ask for, but let me address this point first:  Norwegian operators addressed this issue in 2000.  By harmonizing the rate structure and passing 67% back to content providers (it is now close to 75%), the market in Norway for premium content exploded six fold overnight.  So did the carriers support calls explode as well?  Nope. In fact, they educated people that content not bought on their portals were the responsibility of the company selling them. A website listing contact details of all short code owners was created, and the automated voice prompting at customer support educated users where to go if they had issues.

I’ll provide another example of the impact of poor business models: We were in the position of spending a lot of money on ads promoting an on-deck service, but were offered a CPM rate of $25, and on 60% rev share and hosting costs and suppliers to pay, we needed a CPM rate of $12 to make a profit on promoting a $2.99 service.  To us the proposition was quite simple: If we made a profit on ads, we would spend on a continuos basis. But the poor rev share and high CPM made it a losing proposition thus we stopped the campaign, and eventually a very good service died a slow death as we were relegated 10+ clicks from the home page as the novelty of the service wore off with the carrier.  Still, users loved the service, but it was killed by the business model. Had we made a profit on the ads, the carrier would have made great money on ads + data traffic + rev share, so we both lost in this case.

Also, I have been privileged to see a very detailed cost accounting for what constitutes “billing costs” for a carrier, which includes of course system development/integration and management, contract defaults, support calls that do go through to a live customer support person etc.  I cannot reveal which operator it came from, but their subscriber base was way less than 5m, and they estimated their costs to be around 17%.  If economy of scale has relevance (and in transaction based systems they certainly do), then any large carrier should have costs way below this.

In the end, the effect of the business model can be viewed a supply/demand issue.  I wrote a white paper on this years ago, but the basic premise is that the demand curve is not a straight line, rather once you hit a certain threshold on price, volumes increase dramatically.  This was proven by Arthur Andersen economists in an EU commissioned report and it was also evident in the explosive growth in mobile services in Norway in 2000.  Price is very much dictated by revenue shares (and of course data charges to the consumer), and current business model locks us at the top left in the demand curve, meaning low volumes at high prices.