Portal Revenue Models

A successful mobile business model must address the following questions: Does our portal offer the right content? Are we using an appropriate revenue model? Is our web content appropriately priced? Attractive content and customer acceptance do not guarantee a mobile service offering's profitability.

Confusion as to the appropriate revenue model for mobile portals is a major obstacle in determining the initiative's profitability. This confusion largely results from not knowing which mobile services customers truly want and will pay for. A number of mobile services have been introduced with little or no understanding of how they will make money.

To plan a portal venture successfully, careful analysis of the revenue models and customer adoption trends is essential. Make a mistake and you are liable to lose millions of dollars. So, what are the different revenue models? There are five basic portal revenue models: 1) access revenues, 2) advertising revenues, 3) subscription revenues, 4) transaction revenues, and 5) micro-transaction revenues.

Access Revenues
In the face of slowing subscriber growth, mobile operators are concentrating on data services. Revenue for network operators will increasingly be derived from data access. The major operators - NTT DoCoMo, Sprint, Vodafone, New Orange, and Deutsche Telekom - want to increase the data revenue per user. As a result, they are attempting to gain and to maintain their control over the data services customers will access. The network operators either are developing their own versions of these services or partnering with other firms to acquire them. The data-dependent nature of future mobile device revenues reduces the operator's role to little more than that of a bit pipe. Thus, the operators are positioning themselves as gatekeepers, charging customers an access fee to connect with their service and content providers.

For example, NTT DoCoMo's access revenues are based on roughly $3 per month for a basic subscription, plus usage charges at $0.003 per packet. The average communications charge runs about $10 per month. Total monthly fees average about $13 per subscriber. Multiply these figures by 12 months and 25 million subscribers and you have NTT's basic data access revenue per year. NTT has also found that users' preoccupation with i-mode has increased their voice call spending, which, when billed separately, provides an estimated $2 billion additional revenue annually. Neither of these revenue sources includes the revenue NTT garners from its data web services or from the commissions it levies on its service providers.

One of the things mobile portals have a hard time dealing with is the concept of near-, mid-, and long-term pricing. Depending on the maturity of the market, different pricing strategies need to be created. For example, America Online moved from variable-rate pricing to flat-rate pricing in 1996. In some markets, the flat-rate access model is being threatened by the growth of "free" Internet access, where the Internet service provider takes a share of the telephony access charge and builds other revenue streams based on advertising and commerce. But it is becoming clear that the free-access model is unsustainable. The cost associated with the network infrastructure required to deliver data-rich applications must be passed on to the customer.

Access pricing has always been a sore issue for customers who hate being nickel-and-dimed. History has shown that single-rate pricing simplifies customer choice and drives consolidation. For example, AT&T Wireless has led the industry in simplifying customer choice through its pricing plans. In May 1998, AT&T Wireless changed the industry's dynamics by offering AT&T Digital One Rate service. This was the first time a provider charged a single rate with no roaming or long-distance fees for a specified number of minutes for calls made within the United States. AT&T Digital One Rate and similar plans by other service providers have increased wireless market penetration in the United States. The introduction of other simplified, targeted rate plans will increase mobile adoption.

Advertising and Sponsorship Revenues
Advertising and sponsorship revenues are derived from companies paying a fee to advertise their products on a portal site. In the web portal space, Yahoo!, Lycos, and Excite are advertising/direct marketing funded. On the surface, the content appears to come at a bargain price, but deeper analysis reveals that the price is sustained by advertising. Internet advertising is more than the selling of visual-impact ads; it is also the sale of direct links from highly used portals such as Yahoo! to transactional sites.

Advertising-supported content is rich and varied. It ranges from annoying pop-up boxes to banner advertisements to complex blends of links, icons, messages, and backlinks that pay commissions to the referring site. Variations of this model include the sale of keywords, such as "airline," in search hit listings, giving a particular web site top ranking on the list and in the banner advertisements.

Mobile sponsorship, or advertiser-funded programming, is being considered as a revenue model. It is expected that advertisers will use this model to convey brand values through association with programs that fit the company's product or corporate image. Similar to the sponsorship advertising used on television soap operas of the 1950s, mobile sponsorship is driven largely by modern market conditions and recognition of spot advertising's limitations in the attempt to meet positioning and branding objectives.

Advertising is the basis for many mobile portal business models. Many of these models are making the common mistake of overestimating the size of the market and the amount of money advertisers would be willing to pay to acquire new mobile customers. Also, as competition builds among portals, the volume and price of advertising usually slumps. Hence, it is hard to visualize a sustainable mobile business model that is based on advertising alone.

Subscription Revenues
The most popular mobile revenue models are based on subscription and usage, with time as the common parameter. These models are designed to obtain up-front payments from customers for access to specific services or content. In contrast to this approach, some mobile portals use free trial subscriptions to get a customer's attention.

Pure mobile portals that charge subscription fees include Palm.Net, which has several pricing models. Subscription fees are usually billed monthly. Delinquent accounts can be canceled immediately. However, a customer who wants to cancel an online subscription often finds that the process takes considerable effort. Many subscription services consider the monthly payment more important than a simplified cancellation process, since cancellations mean churn. Adding new subscribers is more expensive and time-consuming than retaining current ones.

The subscription model attracts customers with services that enable them to maintain continuous contact with the company. Mobile subscription models will likely evolve into multi-tiered or premium service models to more closely match consumer preferences. Tiered models have also been a mainstay for cable and satellite television companies, even with the recent offerings of free broadcast alternatives.

Transaction Revenues
Mobile services are rapidly transitioning from informational to transaction enabled. There are two types of transaction revenue models: 1) match-maker (transaction fee) and 2) distribution (margin).

In the match-maker model, the supplier, not the intermediary, owns the product. The portal revenues are based on the net revenue or the commission it receives from the product's sale. Under this approach, the portal extracts a toll from each transaction. In some cases, the fee is levied to both the supplier and the buyer, and is typically .05-3.0 percent. The complexity of the transaction typically determines the fee. Commercial transaction-based sites range from eBay to priceline.com. Many B2B portals also use this model, but the definition of "transaction" differs from firm to firm in B2B models.

In the distributor model, the intermediary takes ownership of the product. As a result, it realizes the total revenues it gets off the product's sale. For example, a supplier purchases a product for $1.00 and resells it for $2.00. The $1.00 is the supplier's margin before costs. Once cost is factored in, however, the gross margin can be substantially less. Amazon.com is a typical example of this model.

Transaction models look simple in theory but are notoriously difficult to profitably execute. This is especially the case in situations where the margins are low (less than 10 percent). Here, it would take significant transaction volume to build a sustainable business.

Pay-Per-Use Micro-Transactions
Micro-transaction revenues are based on a simple pay-as-you-go service and are essentially one-time pay-per-use transactions ranging from a few cents to several dollars. A typical example is pay-per-view television. A number of gaming, online information and entertainment portals are implementing micro-transaction revenue models in the mobile environment.

The Finland-based company Sonera is the leader in experimenting with many micro-transaction scenarios. For example, a thirsty Sonera wireless customer can call a Sonera switch number posted on a vending machine. The switch sends a command to the machine, which dispenses the beverage. The micro-transaction's cost is added to the customer's phone bill. The same technology can be used with a laundry machine, a car wash, or a movie ticket dispenser.

A flexible billing system is essential to making micro-transaction point-of-sale services feasible. For example, Sonera allows its customers, by dialing the appropriate code, to choose whether to bill an m-commerce transaction to a credit card or to a wireless phone bill. However, for a company to be able to add $0.10 to a customer's phone bill or credit card requires a significant billing infrastructure modification - a change in the way sophisticated real-time transaction-processing capabilities between multiple parties are handled. (Our article "Revenue Enablers: Elements of a Wireless Portal" discusses billing in greater detail.)

Skeptics who doubted that web-based ventures would ever make money are applying the same brand of skepticism to mobile portals, and understandably so. However, some web survivors are finally realizing profits, e.g., Autobytel, MarketWatch.com, Amazon.com, USA Interactive, and Shutterfly Inc. to name a few. Mobile operators eventually will realize profits, too, with the help of success stories, such as NTT DoCoMo, who alert market watchers to the instant market value they bring.