BSS (inc. billing, revenue assurance)

Carriers Need to Rejoin Digital Value Chain

Carrier billing contributed a significant amount of income to mobile operators during the feature phone era. Now that smartphones have taken over, mobile operators have been almost completely excluded from transactions taking place on mobile devices, whether it's in-app purchases in apps downloaded from Google Play, clothing bought on Amazon's mobile app or payments made for Uber rides.

Instead, they are reduced to technical infrastructure providers for other companies. Digital content alone is a $57 billion business -- so what should mobile operators do to get back in the game?

Enabling the sale of physical goods
eMarketer estimates that one quarter of e-commerce in the US will originate from mobile devices by 2017. Shopping giants like Amazon.com Inc. (Nasdaq: AMZN) are enabling the sale of physical goods from smartphones, and e-commerce is now almost as big as the mobile industry. Yet credit cards still remain the primary method of collecting payments for such purchases.

In addition to processing online purchases through carrier billing, mobile operators could look into point of sales transactions as well. While most people will not want to charge a $500 gaming console bought from Amazon to their phone bill, items like movie tickets, pizza and flowers could easily be sold through mobile payments.

Mobile operators in some countries have realized the significant additional revenue that the sale of physical goods can bring and have begun to cut back on their revenue shares, the biggest obstacle so far. One noteworthy example is South Korea, where payouts are close to 90%, making the sale of many micro-transaction-sized physical goods conceivable.

Turkey is another good example where carriers differentiate payouts based on types of goods sold: while virtual goods payouts are only 60%, physical goods vendors receive 92% of the end-user price. Mobile operators that wish to enter the physical goods market need to realize that the uplift in transaction volumes will more than compensate for their reduced revenue share.

Breaking the app store monopoly of credit card companies
People spent $10 billion in Apple Inc. (Nasdaq: AAPL)'s App Store last year. This number could easily have been five times bigger. Why? Because Apple only uses credit card based billing for their app store. This enables them to reach approximately 1.5 billion people credit card owners globally. However, 2 billion phone owners without a credit card are left without a method to purchase content in such app stores.

Out of the 10 biggest smartphone growth markets in 2014, six are emerging countries with extremely low credit card penetration. This means app store revenues will not continue to grow in line with smartphone ownership growth, which in turn forces companies like Apple, Google (Nasdaq: GOOG) and Microsoft Corp. (Nasdaq: MSFT) to find alternative ways to enable developer revenue.

Here is where mobile operators can step in: With an existing billing relationship to every single smartphone owner, carriers can grab the leading position of app store billing providers from credit card companies. Google and Microsoft have already launched carrier billing in several markets and Apple will most likely follow suit. The opportunity for mobile operators here is tremendous, illustrated by the launch of carrier billing by Microsoft in Mexico and Indonesia:

Carrier Billing in Mexico & Indonesia
In markets with very low credit card penetration like Mexico (left) and Indonesia (right), adding carrier billing has shown that users are willing to pay for digital content if a payment method that is widely already used in the country becomes available to them in a new channel. (Source: Microsoft)
In markets with very low credit card penetration like Mexico (left) and Indonesia (right), adding carrier billing has shown that users are willing to pay for digital content if a payment method that is widely already used in the country becomes available to them in a new channel. (Source: Microsoft)

An alternative route to take is building your own app store. This opportunity is available mostly for carriers working in emerging markets where the Android platform continues to dominate and devices without Google Play installed are taking a significant portion of the market. Users with such devices are still hungry for content and this gives the opportunity to carriers.

The third option for carriers is to get those apps on board, which are taking the biggest revenue away from existing business activities. Rather than trying to fight Skype Ltd. , Viber or WhatsApp, carriers should embrace these messaging apps. By offering developers preload and promotion opportunities in return for making carrier billing the default payment choice in these apps, it's possible to sidestep app stores and use the existing end-user relationship for app discovery.

In addition to messaging apps, additional revenue opportunities can be found in the digital entertainment category. Most streaming services such as Pandora Media Inc. are avoiding emerging markets due to commercial term, which are not suitable for licensed content -- much like with physical goods. If carriers are willing to back down from their existing revenue shares, the volumes for such digital content consumption could be huge.

-- Gerri Kodres, Senior Vice President of Business Development and Carrier Relations, Fortumo

JohnBaRoss 11/13/2014 | 2:34:49 PM
I agree with Gerri! The remarkable reality of carrier billing of eCommerce is that the fundamental topics covered by Gerri have been getting debated since near the dawn of monetizing the internet in the mid-90's.  Natural attrition of telecom leadership over the years ranks high on the short list of factors that have brought about increasing adoption of carrier billing.  Of course back then carriers were dominated by network-centric thinking leaders who viewed those facilities as their crown jewels and billing as a bothersome back office function to possibly outsource.  Commoditization of the crown jewels was inconceivable (not that many years after leadership at AT&T and McKinsey Consulting virtually dismissed the promise of wireless as a niche opportunity mostly limited to aspects of the construction industry).

As some relented on the vision of carrier billing of eCommerce (both inside carriers and outside via partner-suppliers), proof-of-concept began to take hold as beta and pilot initiatives between carriers and web merchants validated that a lift in merchants revenues of 10-30%+ could be realized, albeit with less margins as Gerri discussed (interestingly, if carriers back then applied the same math they used to determine the cost for supporting line item billing of 3rd party VAS with the costs for supporting line item billing of every single call a customer made each month, their business would be unsustainable).

Factoring in that credit card penetration varies by market, as do regulations vary by market (with laws governing what can and cannot be billed, as well as generous laws that empower consumers to deny knowledge of transactions), there still remains the undeniable truths that:

- Carriers can help web merchants/online retailers reach larger addressable markets,

- Carriers can help bring sizable numbers of people off the sidelines of eCommerce,

- Carriers can unleash incremental revenues from transactions increasingly riding their rails,

- Carriers can create stickier customers (residential and businesses) by fully leveraging their core competency of direct billing,

- Carriers can continue to follow the trails blazed by South Korea and Japan where the bounds of carrier billing continue to be expanded and validated.

Carrier billing absolutely can support billing of physical goods, as well as various models of in-store shopping in the brick and mortar world.  Carrier billing can lead the ever evolving payments industry by morphing pre-paid models into their carrier billing offers, including with sub-account billing that could have pre or post-pay variable limits.  Rather than argue about whether or not customers will or will not accept 'big' bill on their monthly phone bill, develop models that empower each customer to earn and advance to the monthly billing limit they are comfortable with.

There remains so much exciting upside to the carrier billing space that IMO it is without a doubt one of the most exciting spaces in the global economy.
DHagar 9/15/2014 | 12:21:47 PM
Re: Carriers Need to Rejoin Didgital Value Chain StephenCNorth, I fully agree with you on the distinct and separate business models.  As we have all noted, the space is yet unfilled. 

I tend to agree with the view that the opportunities for the carriers, in building a network, will offer the earliest market entry points and can "claim" space in this new opportunity.  I don't know that they will, but the "real estate" in creating the networks, would offer them a shot at defining the new markets.
StephenCNorth 9/12/2014 | 9:41:31 PM
Re: Carriers Need to Rejoin Digital Value Chain The article is interesting, but maybe not that realistic. Carriers invest almost incomprehensible levels of capital to deploy vast physical networks with huge operations staff and large consumer marketing organizations, with the relatively thin margins characteristic of most operating companies.

Companies at the top of the stack (like Google, Netflix, Facebook, etc.) operate in a much different financial model. They focus on creating intellectual property and software services with a smaller number of more highly paid employees, and operating much less capital-intensive services. They have attractive margins and P/E ratios.

It appears it is difficult to blend these financial models and there may be economic forces that promote their disaggregation.

Obviously, each side covets the apparent advantages of the other, but can't take on their liabilities and the investment community does not support it.

It will be interesting, therefore, to see whether carriers or Internet companies will own the "connected home."  If you believe this is a software/data analysis/integration/user interface problem, you get one answer. If you think this is a truck roll/operations problem, you get another. Interesting to ponder the consequences.

MordyK 9/11/2014 | 2:55:16 PM
The real value As someone who has been in the payment and carrier space for over a decade, this argument sounds like something along the lines of the "how do we fight the OTT's" approach, and while it has merit it is really just about recapturing a market that was always theirs in its smaller form.

I would argue that the carriers have an opportunity to create a real micro-transaction network for small transaction amounts that crosses the physical interfaces of mobile, web and real world. The best example of the real world value is something that combines Hong Kong's Octopus with the EZPass (and its counterparts) in the US, along with in-app mobile purchasing.
DHagar 9/10/2014 | 9:59:00 PM
Re: Carriers Need to Rejoin Digital Value Chain @Gerri, great strategy and positioning for the carriers.  I think developing the advantage they have with their end-relationships and developing POS capabilities makes sense.

That space will be filled by someone - they should follow your advice and get on board!
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