Disrupting the wireless industry, part 2: business model

April 25, 2007 at 6:49 am Leave a comment

So what would the the business look like for a venture that tries to become the Next Gen mobile service provider?

First – what it will not be. Today the cellular business is around (i) a bundled monthly service fee (ii) subsidized handset. Get this handset for free, and pay us $50/month for voice+wireless+handset. No *real* differentiator between the operators (Voice+sms is pretty much what most people use) and diffrentiation between handsets is mostly around industrial design. As a result, customer acquisition costs are in the $200-$300 range. So the math looks like: operators pay $250 to get you as a customer, give you a handset and collect $50 for 18 months so $900 Life Time customer value.

The key to the existing business is maintaining the $50/month revenues. If we take it away (original blog post: WiFi+GSM handset, VOIP over WiFi. 75% of usage on WiFi @ home or office, GSM used as backup where customers bring their own SIM) i.e. no more $50/month. Can we build a business?

Yes we can. But it is a different business – with a much smaller ARPU per user – and as a result smaller (if any) handset subsidy.

What are the revenue sources:

The first one – from a chronological perspective – will be ‘mini services’ : Very similar to Skype on the PC: $5 per 500 SMS or international termination. Or $5/month for transcribing voice messages a la Spinvox. Content – ringtones, games and screen savers are counted here as well. How much will be the total user spending per month – probably not more then $15-$30 spent across a few different services. The spending is capped by the PC world – where most of the services are free. So consumers’ mental model for WiFi enabled devices is more of the Internet model rather then the cellular model.

The second source of revenues is from the ‘Audience’ model. Or as some prefer to think about it – advertisement. Once a critical mass of users is built, then the community can be monetized. Its a long process to get there – and its not clear how big it can actually be. the case can easily be made that if you apply the web model, and take into account that unlike the PC – the handset is with us 24/7 – then we are looking at a factor more than the PC. Bring on video ads, click to call and click to act, and woo… you can dream of $20-$50 per month in ad revenues. Ads on mobile will happen. But how much will it be worth – very hard to predict. Because the key factor is what will consumers be willing to tolerate and find useful. On a limited screen and on a highly personal device. This is not something that can be assessed by doing colorful complicated spreadsheets that will make your McKinsey EM proud. The audience model can probably become the dominant source of revenues – but its too early to say if we are looking at $50 or $5 a month opportunity.
Bottom line: Some money on the device, some money on ‘Mini Services’ and as the community builds more and more revenues will come from monetizing the community – the PC audience model. What will be the mix ? We will find out in a few years…
To make any such business profitable, the key obstacle is the customer acquisition costs. If you have to spend $250 to get the customer who will then get you $20/month – its a non starter. The business just does not make sense. And that is the real challenge: is it possible to create a customer experience and services which are so compelling, so exciting and so valuable that they become viral? Can we get away from the spend marketing-dollars-superbowl-ads-brain-wash-brand-building as the only way to get consumers to use the device? What is the consumer offering that users will be willing to pay $200 to buy this handset because it is so ‘cool’ and so valuable to them?

Ram

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Entry filed under: Devices, Google, Mobile, Nokia, Open Source, Random Thoughts, Skype, Technology.

Technology, individual killing power and reflections on Viriginia Tech China’s shadow, immigration policy and how to steal the best brains.

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