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:

Figure 1: 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)

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