Dividing the spoils

Operators contemplate m-commerce models The inflated prices carriers have been paying for third generation spectrum licenses puts pressure on them to design services to earn that revenue back. The services' silver bullet, operators are hoping, is mobile commerce. But no one has sculpted a finished, profitable business model for mobile operators that want to siphon a substantial revenue stream from the transactions expected to flow across their networks.

In the U.S., m-commerce business models for operators are developing slowly, and carriers remain tight-lipped about what's in the whiteboard stage. In general, however, operators see two, maybe three, forms of revenue arising. The first is a "slotting" fee, a charge to the electronic merchant for taking up valuable real estate on the mobile service's Web menu that appears on a phone's screen. The second is to share in the transaction, in which operators take a percentage of the purchases being made through their networks. And the third, which most carriers don't like to discuss, is the metered charges a user incurs while making a purchase.

So far, charging for the real estate on a cellular phone screen is a popular route for wireless data carriers such as Sprint PCS and AT&T Wireless. "They've leveraged the highly valuable real estate on the phone and gone after marquee players in the e-commerce world," said Ken Hyers, wireless strategies analyst at Cahners In-Stat Group. They're simply building enough content to justify people using the services, he added.

Sprint PCS has varying revenue models for each of its commerce partners, said a Sprint spokesman, and some agreements even include payment for driving a threshold amount of traffic to a merchant's site.

Extending that model of being a "matchmaker" for their subscribers and e-commerce sites, mobile operators see collecting a percentage of each transaction in exchange for providing merchants with highly targeted customer information as being an even more lucrative revenue stream.

But the problem with slotting fees and revenue-sharing models is that brand-name e-business sites, whose margins are often already razor-thin, usually don't see the value in such arrangements because they don't offer the operator much control. However, business models are emerging - mostly overseas - that may offer operators a greater return from m-commerce.

The fundamental problem with m-commerce, said Oliver Steeley, principal consultant for Consult Hyperion in the U.K. is the payment instrument: credit cards. Although suitable for physical transactions, they don't work as well on the Internet, and they work worse on mobile phones, he said.

For that reason - and because phone companies are adept at processing and billing high-volume, low-value transactions - many operators in Europe are exploring micropayments. In other words, they offer users low-value credit or debit services via their mobile phone bill. According to a recent Dataquest report, more than 65% of mobile operators in developed countries will enter the mobile payment market by the end of 2002.

"The question has come down to, `Is the carrier going to be the company that provides the service and handles the billing or simply the conduit through which a customer meets the business?'" Hyers asked.

By directly handling low-value transactions - typically $10 or less - mobile operators can cut the payment-processing fees charged by banks and credit card companies. Of course, it also means they take a credit risk - something that scares U.S. operators, said Scott Blanksteen, a director of product marketing for Qpass, a digital commerce service. "Some carriers are very interested in putting small value items directly on the [bill]; some are opposed to the idea because they don't want to take the chance that a user will dispute a charge and not pay their phone bill," he said.

Another viable model in Europe, where prepaid customers represent about half of all mobile users, is the use of prepaid vouchers for purchasing goods or services other than telephone calls, Steeley said. BT Cellnet, in conjunction with a digital money system called Qdodge, is testing instant prepay mobile vouchers that users can buy from kiosks.

Whether such a system would work in the U.S. is questionable, however, because prepaid wireless phone service has not caught on as it has in Europe, and use of digital currencies - "funny money" - has had a similar cold reception on the Internet, Blanksteen said.

With the takeoff of m-commerce by no means assured, one could argue that the specific business model is the least of mobile operators' worries. Instead of focusing on what share of the revenue stream they will win, providers should concentrate their m-commerce brainpower on solving the problem of how a person actually makes a purchase on a mobile phone, Blanksteen said. "If there aren't transactions taking place, [operators] aren't going to get a share, and they're also going to have a hard time justifying slotting fees," he said.