December 18, 2001
Time to Get Paid

Let’s face it: Next-generation wireless data isn’t about high-speed service and gee-whiz apps. It’s all about the Benjamins.

Just ask investors, most of whom have spent the past year taking their bets off of wireless amid concern that carriers don’t know have a clue about how to turn data from a loss leader into a money-maker.

The events of the past few days probably haven’t done much to change that opinion. On Dec. 14, Microsoft publicly complained that it can’t give its 30 million European Hotmail subscribers wireless access to their e-mail because carriers there don’t have billing systems capable of tracking and charging for the service. You’d think that wireless providers would be eager to show that wireless data can generate revenue before passing the hat to investors in hopes that they’ll cough up the billion necessary to upgrade to third generation. Apparently not, considering how many wireless providers are literally giving away 2.5G services.

Also on Dec. 14, Vodafone, the world’s largest wireless carrier, announced plans to launch a micropayment service in the United Kingdom by the first quarter of 2002. Vodafone subscribers will have the purchases added to their phone bills, while prepaid customers will have them deducted from their balances. The service will be a “significant driver of increased average revenue per user,” Amit Pau, managing director for multimedia at Vodafone, told Dow Jones Newswires.

We’ll see. One potential revenue model has Vodafone collecting transaction fees, which would help data’s share of total revenue grow from about 9% today to the company’s goal of at least 20% by 2004. But it’s questionable how much revenue these transactions will actually generate: Vodafone says the service will be used for purchases of less than 10 euros (roughly $9), but back-office costs such as billing easily can eat up all of the retail price of small-ticket items such as sodas and snacks, where margins already are razor-thin. Worse, a recent GartnerG2 forecast says that by 2005, 90% of e-commerce transactions will still be on computers rather than on wireless devices.

There are better ways. By providing services such as customer authentication, wireless carriers would play an active role in m-commerce and thus be in a better position to demand a piece of the action. If they don’t, they risk ceding the market — and revenue, including airtime — to alternative payment systems that offer retailers a faster and perhaps cheaper way to support cashless payments. One contender is RFID, a variation on the drive-by payment systems used on toll roads that’s in various stages of deployment by retailers ranging from The Gap to McDonald’s.

That’s not to say there aren’t any wireless-data success stories. Take Japan’s i-mode service, where content providers pay a 9% royalty to NTT DoCoMo for handling their billing and tacking the charge onto i-mode users’ phone bills. That business model is a major reason for i-mode’s success: Small content providers can’t make a business case to buy their own billing systems, but piggybacking on NTT DoCoMo’s system is a cost-effective alternative. Without this business model, many content providers probably couldn’t make a business case for expanding into wireless, and i-mode probably wouldn’t enjoy the depth and breadth of content that makes the service so popular and lucrative.

Meanwhile, a new study by the < href="http://www.pcia.com">Personal Communications Industry Association trade group and Yankelovich Research found that nearly 38% of U.S. wireless users would prefer to have charges for mobile services appear on their phone bills. Only Japanese and South Korean users showed greater preference, at 55.9% and 59.4%, respectively.

With that much interest in bundled bills, why haven’t North American wireless carriers adopted the i-mode revenue model? Good question. It’s possible that their billing systems simply aren’t up to snuff — Microsoft’s complaint in Europe. One school of thought argues that carriers are so worried about being “dumb pipes” that they’re reluctant to cut deals with third parties such as content providers, with whom they’d have to share revenues and control over customers. It’s an old argument — and one that i-mode has shown isn’t necessarily valid.

Cultural differences also should be taken into account before importing a foreign idea, and wireless data is no exception. One argument is that although U.S. phone companies might be monopolies, they tend to intimidate their would-be competitors more than their customers.

“NTT has always been the huge, respected, trusted telephone monopoly in Japan, so the brand carries considerable weight,” argues David Chamberlain, research director at Probe Research. “When a company like NTT sends you a bill, you pay that thing and no questions are asked.”

Not so in the United States, where the Dec. 16 edition of “60 Minutes” looked at why so many carriers have paid so much to settle charges of slamming and other customer abuses. Ask any Joe or Jane on the street whether they’ve called their wireline or wireless carrier’s customer care to dispute a charge, and chances are that you’ll hear “Yes.” Those disputes affect the carrier’s bottom line in various ways, ranging from lost customers to increased costs from staffing call centers. The latest casualty might be mobile commerce.

“We don’t trust the carriers not to screw us and, to date, they haven’t done anything to prove our suspicions wrong,” Chamberlain says. “They know that we will run their customer-service organizations into the ground disputing every downloaded Pikachu, every e-mail messages and every cola we buy and add to our account. We’re not ready.”

Will we ever be ready? Wireless providers had better hope so — and soon. Without transaction fees from m-commerce, it’s unclear how consumers’ tepid response to wireless data will ever produce the billions in revenue necessary to pay for 3G infrastructure and spectrum.

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