Handicapping M-Commerce

Getting ready for wireless e-commerce.

E-commerce means many things to many people. To customers, it represents convenience, a chance to buy, trade or make financial transactions without leaving home. To Internet-service providers, it's a way to make portals more alluring. Merchants use the Internet to reach customers all over the world, without setting up brick-and-mortar operations everywhere. But there's another side to the e-commerce story — the area in which wireline telcos missed an opportunity to compete.

Without an understanding of the complexities and choices involved in pulling profits from the emerging technology, the wireline providers failed to develop strategies for entering the market. Some observers say wireless providers should consider this part of the story a cautionary tale.

Most analysts and industry insiders associate huge earnings potential with wireless e-commerce (m-commerce). But many of these insiders also say the successful wireless providers will be those that can overcome existing handicaps to competing in a content-oriented business.

What's Down the Road?
Analysts at Ovum research and consulting firm foresee 110 million North American users of m-commerce by the end of 2005. They predict these users will generate more than $47 billion in revenue. But, in the short term, earnings for telcos may be slim to none, the analysts predict, and achieving success will be challenging. In "Mobile E-Commerce: Market Strategies," released in March 2000, the Ovum analysts identify three major hurdles:

• The complexity and range of choices faced by telecom operators over the next five years, which will make strategic decisions very difficult

• Limited network-development resources

• The need for new skills that are outside the core competencies of most players, as well as a re-evaluation of core skills to deal with wider competition.

Duncan Brown, an Ovum analyst and co-author of the March report, said the key to success in m-commerce is offering unique and compelling services.

"Potential mobile e-commerce players have to realize that at this point in time, good substitutes for their services already exist," he said. "For instance, what's to persuade someone to order a pizza using a mobile application, rather than just picking up the phone? There would have to be significant value-add to change habits: perhaps discounts, an up-to-date menu on screen — easy selection of pizzas and toppings with few key presses — and no waiting for engaged phones or overworked counter staff."

Adding value means playing to the strengths of wireless, the Ovum report said. This primarily involves service providers offering customers personalized services that can be tailored to the location of the user. For example, a business traveler who is a sports fan might personalize his service to gain access to information about sporting events when arriving at a new destination. The traveler might then be offered discounts on tickets and an opportunity to make purchases on the wireless device.

Getting Ready
These kinds of personalized and location-based applications epitomize the future of m-commerce, according to a number of analysts, including those at Ovum. But before such killer apps can be offered on a grand scale, several handicaps must be corrected.

For one thing, wireless providers must become familiar with the terrain of m-commerce.

"The big thing for wireless telecommunications companies to understand is the nature of the business they're getting into," said Andrew Whinston, director of the University of Texas-Austin Center of Research in Electronic Commerce. "They have to rethink their whole business in terms of orientation toward data and away from voice, which means they have to start thinking of themselves as portals and offering content."

Whinston, a specialist in economics and the technology of e-commerce, also offered another possible scenario: If providers don't effectively become portals, they'll be marginalized into the narrow role of wireless providers, as wireline-service providers have been in the e-commerce sector.

Decisions, Decisions, Decisions
Wireless providers can participate in m-commerce in two ways, said Carla Schneiderman, Corsair vice president of marketing business development and sales: by furnishing the wireless Internet portal or participating as a merchant.

Schneiderman recommends wireless providers supply the portals.

"The wireless-network infrastructure and the subscribers they own are analogous to a network of roads with residents using the roads," she said. "Owning the roads gives the carriers power to control which merchants can open shops by the roads. They also have the power to collect tolls for usage of the roads."

Whinston agrees.

"I don't think carriers should do anything in-house," he said. "They should partner with companies that have the software to support delivery."

Whinston added that providers who want to capture profits from m-commerce must seriously consider their strengths, weaknesses and changes they may need to make before entering this business sector. His biggest caveat to wireless providers: Avoid wandering alone into the unfamiliar territory.

"Carriers are uniquely unqualified to get into the business of content," he said. "So they should partner with content people, as opposed to doing business on their own."

The list of potential partners includes content providers, financial-service providers, equipment manufacturers, software vendors and ASPs. Providers that plan to form alliances will have the task of choosing partners and developing a strategy for working with them.

Technical Considerations
Working successfully with partners depends on behind-the-scenes processes, such as billing. Handling the billing associated with value-added services and handling payments to content providers present unique challenges.

"One of the biggest challenges is how to bill for services," said Judy Dumont, Lightbridge vice president of product management. In the world of m-commerce, various products and services may be included in the wireless phone bill, and service providers can choose billing packages or usage-based rates for airtime and access to particular services. Service providers also can offer pre- or post-paid accounts (or both) for m-commerce transactions.

Then there's the issue of security. With all of the transaction types m-commerce brings to the phone, how can service providers ensure customers' account balances don't exceed the customers' ability to pay?

"Operators need to be sure applicants are qualifying for a higher rate or variable rate of services," she said.

Dumont suggests providers customize application policies to fit particular product packages and build a system in which applicants can be qualified quickly.

"Mobile commerce opens the door for fraudsters to set up a business and take operators to the cleaners," Dumont said. "So risk management needs to get kicked up a notch."

Working with prepaid accounts is one way to heighten security. But even prepaid accounts present challenges.

"How do you transmit back to the user that they're running low?" Dumont asks. "And how do you make the account quick and easy to replenish?"

Corsair's Schneiderman recommended prepaid accounts be used as a standard in m-commerce, but said account-management measures were needed to prevent financial losses.

"You have to have a very detailed audit trail that allows you to access accounts in real-time," she said. "Carriers should look at their billing systems and ask how they can handle real-time rating."

In other words, a customer might make three or four phone calls and purchase tickets or merchandise within a 3-hour period. The provider must be able to debit the account when the purchases and calls are made, otherwise the customer could spend more than he has deposited in the prepaid account.

"The ability to make many transactions in a short period of time goes up exponentially when you use a mobile device," Schneiderman said. "So we have to be careful to build in a lot of security."

Schneiderman said most major billing vendors are adding real-time capabilities to their software packages. She encourages service providers who are seeking a billing supplier to look for companies with real-time capabilities.

"The (vendor) should also be able to tell you what the products will look like in two to three years," she said.

In the m-commerce realm, billing vendors will add to their traditional role by offering non-traditional services. For instance, some will serve as intermediaries between wireless providers and e-merchants.

"One of the major benefits of asking another company to manage relationships is that the wireless company gets to focus on its core business," Schneiderman said. "The con is that service providers perceive that there may be benefits they could negotiate through direct contact."

For those service providers considering placing vendors in an intermediary role, Schneiderman recommends an investigation of vendors' existing relationships with merchants. Providers should select vendors whose relationships fit with the target customers' demographics. For example, if the service provider covers a market with a large Hispanic population, a vendor that can broker Spanish-language news services might be a good business match.

In addition to seeking suitable partners, service providers also must scrutinize their own operations and consider challenges inherent to wireless. One of the biggest difficulties of transmitting data via wireless involves the scarcity of spectrum and the time required to build out a network, Dumont said.

"Another of the challenges is the whole integration process," she said. "With all the convergence, there are still multiple backend legacy systems that have not been brought together yet."

But Dumont said the biggest challenge is convincing people to make purchases using their wireless phones. In her opinion, getting customers hinges on increasing ease of use, which means reducing the number of keystrokes necessary to perform transactions, and developing compelling applications that will lure end users.

Up & Running
One company's version of a compelling application is an e-mail account, which is connected to a wireline network and accessible from a wireless phone. Sofware.com provides a scaleable Internet infrastructure that enables wireless providers to offer e-mail. The mobile e-mail system differs from an SMS in that the longer messages are connected with an existing network, said Mike Buhrmann, Software.com senior vice president and general manager. In other words, a user can check e-mail from an office network with his wireless phone or PDA.

Buhrmann said such a capability attracts new subscribers. But he also offered a word of caution. Before offering this kind of system, service providers should evaluate their current and potential needs, Buhrmann said.

"Because of the popularity of the market, carriers can end up with millions of subscribers," he said. "So scaleability is critical."

Buhrmann's other recommendations for service providers preparing for m-commerce include:

• Keep operating costs low.

• Create customer-friendly user interfaces to drive mass adoption.

• Choose applications that are flexible enough to accommodate legacy billing systems and new systems.

"A lot of the wireless infrastructure will be transitioning to Internet standards," Buhrmann predicted. "A lot of the SS7 protocols will be converted to IP."

But even with this prediction, he encouraged wireless providers to look for software applications that will meet the needs of today's systems and have the ability to grow along with wireless-Internet technology.

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Waves of M-Commerce

The m-commerce market will develop in three waves. Their characteristics are as follows:

Simple (1999 TO 2001)
• Simple applications with easy-to-use interfaces
• Low media, security requirements
• Single partnerships — operator/financial service provider/content provider
• Examples: banking, simple ticketing and simple information services.

Generic Security (2000 TO 2003)
• Based on the public key infrastructure, which will enable wider many-to-many transactions
• Better network capabilities (packet) plus wider deployment of WAP terminals
• Examples: generic goods purchases, sophisticated ticketing and information services. Location technologies will play a role in developing the value in this wave.

Rich Media (2002 TO 2005)
• Better terminal capabilities and multimedia networks will enable rich media applications.
• Examples: media downloads and streamed media.

By the end of 2005, user adoption will be dominated by consumer users who will represent more than 75% of the user base and will generate approximately 66% of the year's revenues.

Source: Mobile Commerce Market Strategies by John Davison, Ann Walsh and Duncan Brown; Ovum

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Facts & Predictions About M-Commerce

• End-user expenditures on m-commerce services will rise to more than $200 billion in 2005.

• The combination of enormous potential and uncertain revenues gives the feeling of a new gold rush, with hordes of hopefuls heading into uncharted and unforgiving territory, many with minimal preparation.

• M-commerce will work best in those areas where it can emphasize the core virtue of mobile networks -- convenience.

• Market players must work out why their mobile offerings are attractive, with demonstrable advantage over established substitutes, and promote the advantage to potential users.

• There are several potential business models and tussles over who will control key areas such as payment and settlement.

• A complexity of this market is that it requires close partnerships between a series of players to make the applications work. No single organization has all of the skills and resources needed to deliver the end-to-end experience.

• Potential players are accustomed to owning the customer experience. But this will be more difficult with the m-commerce delivery chain.

Source: Mobile Commerce Market Strategies by John Davison, Ann Walsh and Duncan Brown; Ovum