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The Operators vs. the Media Brands

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Chetan Sharma is co-author of upcoming “Mobile Advertising” (John Wiley) and “Mobile Broadband” (IEEE Press). He is an adviser to several operators and media brands around the world.

Over the last three months, there has been significant discussion around the notion of “open access,” with Apple promising to release its developer kit for the iPhone; Sprint Nextel launching its WiMAX business, XOHM; Verizon Wireless saying it will open up its network and platform; Google’s efforts around Android and a possible gPhone; and the 700 MHz auction. The two massive industries of communications and media/online are clearly at loggerheads. How this battle shapes up over the course of the next few months will define how you and I will consume media, entertainment and information.

Media companies and mobile operators think about customers differently. Operators are focused on subscriber acquisitions, while media companies are fanatic about audience acquisitions. Operators think in terms of adding a few hundred thousand subscribers a month — media companies, of millions. In the Telco 2.0 world, where service providers aspire to become media and entertainment brands, shouldn’t operators be thinking like media companies? Shouldn’t they be more focused on audience acquisition strategies — selling their goods beyond the confines of today’s existing barriers?

If we look at the strategic canvas of the mobile data industry, it’s clear that operators currently have a huge advantage over media brands. Mobile operators’ advantage in the current landscape comes from their superior reach, as well as the capability they have to segment and profile users. Their current influence over the ecosystem is a magnitude ahead of media brands. However, in other areas, such as user experience, content, and the ability to be quick to market — media brands have a stronger strategic footing, and they will use it to close the gap in the other areas.

Too much ink has been wasted on the equation of being a dumb pipe. Dumb does not imply little or no value. For operators, nothing is more troubling than the insinuation that they will be reduced to bit pipes, becoming utilitarians tasked with keeping the streets clean while the media companies zoom past them in their Ferraris. Yet operators need to realize their unique value propositions, come to terms with both what they are great at and not, and structure their monetization strategies accordingly. The growth of the nascent mobile advertising industry is largely dependent on it.

While it is conceivable that some operators can become content and mobile advertising powerhouses, the evidence points us elsewhere. Operators and media companies sit at the exact opposite ends of the spectrum in terms of cultural and media savviness. Mobile operators are very engineering focused and extremely conservative in their approach to the critical operational aspects of running a cellular network. Media companies, on the other hand, come up with the most creative ways to express a brand message in a landscape that would burst the brains of the very brightest network operators with all of its consumer nuances and related myriad creative intricacies.

To be successful over the long term, operators need to focus on the unique elements that only they can provide — such as location, presence, user profiles and platforms for applications; as well as device and network APIs — and build business models around abstracting this information so that the ecosystem can utilize them to enhance user experience and usage. Such an approach will enhance their competitiveness in the media ecosystem, keep the usage and ARPU levels up, and get more entrepreneurs and users involved in moving the industry to its next milestone.

Such an ecosystem will also empower entrepreneurs to keep pushing the boundaries of technical and business innovations to make mobile media and advertising a sustainable, vibrant and scalable industry at a much faster pace — and will help deliver on the promise of “open access” better than any rules in the 700 MHz auction.
This shift in mindset (and subsequent execution of the resulting strategy) will have a direct impact on any viable mobile content and advertising strategy. Advertisers look for an audience, precise targeting, and measurement. If operators can help deilver that, then their media strategy will flourish, but if three years down the road, media brands have five times the audience…well you know what happens next.

20 Responses to “The Operators vs. the Media Brands”

  1. The airwaves belong to the People. The media and providers are attempting to control the distribution of our airwaves. The issue is not which will win, but rather how we use the airwaves we own. Wireless mesh networks demonstrate that an infrastructure for providing access to the airwaves we own costs less than $50 per house for a Meraki unit, and less than $10 per house per month to obtain and enjoy broadband speeds up to 54Mbps, today. In the future, that speed will increase, and costs will be lower. So, why not acknowledge that the issue isn’t about entry cost, and discuss how best to shift to an infrastructure that benefits the People? Media and providers can argue amongst themselves, while we receive the mandate of a government that is supposed to be on our side, not theirs.

  2. Good article, Mr Chetan Sharma. I have also wasted ink on the topic:

    Apart from the 3 “special powers” mentioned by Shai Berger, I would add QoS. With IMS deployed, only the mobile operators can control QoS. A guaranteed QoS enables carrier-grade VoIP and other real-time conversational services, like high definition video calls and video sharing, that Internet players can not deliver with best-effort Internet QoS.

    Once the operator controls the real-time services, then it is in a strong position to bundle presence, location, user profile and IM with conversational services. Without this bundling, Google, Microsoft and Yahoo are even in better position than operators to provide applications based on presence, location or user profile (including advertisement).

    On the content delivery side, similarly the battle is not lost for operators if they show the determination and courage to play their cards. See KDDI example of a music service that competes head to head with iTunes.

  3. Mobile operators will face financial challenges as they plan to deploy new technologies in a saturated market. Saturation in mobile penetration will result in increased competition for the existing subscriber base and continued focus on existing value drivers…

    Typical Western European markets are saturating at the 80% penetration level. However, there will be increased operator focus to migrate this subscriber base from the current 2G service offering to GPRS and 3G services. To migrate customers from 2G to 2.5G services, operators will need to migrate their own subscribers and churn competitor subscribers, and attract them to upgrade their handsets to take advantage of new services. As a result, key operating expense drivers like subscriber acquisition cost (SAC), subscriber retention cost (SRC) and customer churn will continue to be an area of focus for operators. Increase in ARPU will continue to be the main driver for revenue.

    … and financial markets are expected to challenge operators’ future investment plans
    Exhibit 1
    Subscriber penetration in the UK

    Source: Analysys

    A typical operator (in one of the five largest European markets) is expected to invest nearly EUR1 billion in the next four years in expanding GPRS capacity, as well as rolling out initial 3G networks in major cities. The basic operator business model in Europe is driven by voice and SMS revenues. Packet-based GPRS networks for data are still relatively unproven as business successes. As GPRS data networks will have a business model similar to future 3G networks, it is critical that operators prove the success of packet-based systems with GPRS. The success of GPRS will be increasingly measured, not only in terms of subscriber take-up and revenues, but also on the efficiency of capital utilised. In addition, potential consolidation within the industry will put increasing pressure on enterprise valuations.

    Financial markets are expected to increasingly evaluate companies on capital efficiency ratios
    Markets have traditionally compared company valuations on subscriber and EBITDA ratios, though valuation ratios themselves tend to be volatile

  4. maybe you are lumping in “application” player with media companies. . . but I believe independent application players are about to take a big chunk of the value chain (but still tiertiary in influence to media comapnies and operators for the foreseeable future).

    Developing applications is not the expertise of media companies nor telecom operators . . .

  5. Scott, Shai,

    Thanks for your comments. While there are other ways to enable/leverage network features, operators are still better positioned (currently) for the mass-market (as it relates to mobile). Whether they (or are able to) leverage that position or not is the point of my discussion.


  6. Well, I’m guilty of “wasting ink”, as you say, on the dumb-vs-smart pipe discussion. Admittedly, that’s a simplistic analogy for a very nuanced issue. My two cents here:

    I agree with Aswath that location, presence and user profile info can be gotten without carrier involvement. For location, see for example what Navizon is doing. For presence and profile, see Jaiku (now part of Google).

    I think there are 3 “special powers” that carriers bring to the table: 1) Billing relationship (customer support, extending credit, bundling programs, etc); 2) Integration (shortcodes like 411, “Pound and Star” combinations); 3) Marketing (billing inserts, etc.)
    I elaborated on those 3 a bit more here:

  7. Guys,

    Thanks for your comments.

    Aswath, i should have qualified my statement by “for majority of the subscriber base.” Yes, each of the functionality can be provided independent of the operator but for the vast majority, operators are in a much better position to provide/leverage such features (in short-medium term – 3 yrs or so).


  8. I find it difficult to agree with the claim that location, presence and user profiles are unique elements that only the operators can provide. We have demonstrated that the latter two can be provided the individual users on their own. If the devices truly become open then I contend that user location and device APIs need not be unique to the operators. In that case, application platform and Network APIs made available by the operators are not critical.

  9. strong agreement

    Very insightful post…..most important is this concept that “dumb pipe” doesn’t imply no value. Although access will be somewhat commoditized, it is ultimately defensible because it is very expensive to build networks. By definition,this means that there will be few networks, which will allow the carriers to extract value from consumers, advertisers or media companies.