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  • Writer's pictureSlashData Team

Why mobile can bring back the value to the Internet

[Mobile payments hold great potential far beyond what we have seen today. Research Director, Andreas Constantinou, looks at why has the Internet lost its value historically and argues that mobile payments stand to bring this lost value back to the Internet]


mobile-plus-internet

The debate over reversing the loss of value in Internet-based media is long standing. Most observers argue that the Internet has disintermediated the traditional distribution channels, including music labels, news publishers and books. In other words, the Internet bulldozed what was previously the long and bumpy silk road between content publishers and content consumers – and at the same time allowed everyone to become a content producer in what Wired aptly called nanopublishing.

At the same time, a more fundamental change has occured. The tsunami of nano and mega content has arrived via the Internet (ie the PC screen), not via the traditional channels like retail stores, music megastores, bookstores, news kiosks or the 7-Eleven across the street. This has had a fundamental impact to the value of the Internet, due to the fact that there is no convenient, ubiquitous payment mechanism to use on the Internet.

Let me explain why. To pay for goods like news, information, music or books you go to a retail store, hand over the cash, get your change back, and presto in the equivalent of two clicks you re’ done. Same with a credit card; hand out your VISA, sign here and walk away. All it takes is two clicks.

On the contrary, to pay for content arriving via the Internet you need 10s of clicks. Take your credit card, type your name, address (30+ clicks), now enter the 16 (s-i-x-t-e-e-n) digits of your card, don’t forget your expiry date (another f-o-u-r digits), oh and your CVC2 number (another t-h-r-e-e digits). Now let me check all this. And oops by the way your password provided doesn’t match so you have to enter all this again. Not to mention: do I trust this website with my credit card details? The sad truth is, that for any small amount, or as much as you ‘d pay for a newspaper, a magazine or a music CD,  60+ clicks are not worth the bother.

In the attention economy of today, each click churns customers. I would argue that its the lack of 1-click, convenient micropayment mechanisms that the Internet lost its value, not ‘pirated’ music, neither the democratisation of publishing. The poor adoption rates of paid-for content incentivised content producers (both the nano- and the mega-) to reduce their price to zero and thus establish a perception that everything accessed on the Internet is free.

Yet people are willing to pay for perceived value, not matter how small. Value can be created through convenience, choice, flexibility or customisation, as long as payment mechanism does not stand in the way.  iTunes, Spotify, and the array of paid-for music sites have combined convenience and choice with effortless payment; Spotify brings in around 35% of the digital music sales in Sweden, while 80% of Spotify users said they stopped filesharing.

So what does mobile have to do with all this? Here’s the paradox. When applications are freeware or shareware on the Internet, why are people willing to pay $2.5 on average per iPhone application by the bucket-loads bringing Apple’s an estimated $2.4 Billion a year? Why are ringtones costing upwards of $1 when you can Google the same song for free? Why are people willing to pay over 1Euro for texting their vote to the Eurovision song contest or fork out $0.80 for virtual ice cubes on Flirtomatic?

Value exists in mobile, but not because mobile operators still run the game; walled gardens have fallen long ago. It’s because mobile phones offer a 1-click convenient way to pay for goods delivered over the mobile channel; applications, ringtones, competitions and social networking services included. And it’s all charged to your mobile phone bill. How more convenient could that be?

That’s the part where operators proudly claim that they own the downstream billing relationship to the user. But what they seem to ignore, is that they do NOT own the upstream billing relationship to the millions of content providers, nor the millions of goods providers that operator through non-mobile channels (retail, mail-order, web, etc). This is because mobile operators, sitting comfortably in their ivory castles have imposed extortionate revenue shares (typically 30%-60% of total revenues) with upstream content providers that can be justified not in terms of the value they add, but of the near-monopolistic exclusivity on payments charged to the users’ phone bill. Compare this 30-60% commission with the 2%-4% rates that credit cards charge. Mobile operators have so far failed to seize the upstream billing relationship as they only understand the value of the short head (as opposed to the long tail).

How mobile can bring back the value to the Internet Mobile payments are making a big buzz in the industry, especially in developing countries like many parts of the African continent, where traditional banking infrastructure does not exist and mobiles offer an extremely fast and convenient way to exchange money between individuals in rural areas. But mobile payments have an equally important potential in the developed world, in extending upstream billing to content distributed over the Internet.

The most visible efforts to extend mobile payments to the Internet are those from iTunes, Google Checkout and Paypal (for purchases through an on-device storefront), and recently Amazon Mobile Payments (for purchases via a web page). All of these efforts are quite limited in terms of both their downstream addressable market and their upstream range of content publishers they have so far integrated with.

Mobile operators have a unique and unexploited potential in this game. Think of Internet payments which are authorised by entering your mobile number below the ‘buy now’ button. You get an SMS confirming the amount and the seller, you reply and bingo – in 3-4 ‘clicks’ you ‘re done. Such a payment mechanism is both trusted and ubiquitous. The only element missing from the recipe is reasonable commission rates of the order of 2%-4% charged by credit cards. Indeed, operators can reach where VISA cannot. Vodafone’s Vittorio Colao recently remarked how “mobile accounts are a fantastic payment platform for all digital goods”.

There’s a second, slightly more exotic scenario. Consider that Nokia with near-40% handset market share decides to equip all of its mobile phones with NFC capabiliies (NFC chipsets cost $2-$2.5 today and are expected to drop to $1 in 2013 according to this report). If Nokia decides to invest in deploying PC NFC readers under subsidy to Nokia phone buyers, then it has a chance to become a trusted provider of Internet micropayments. Or as Stefan Constantinescu (a Nokia connoisseur) argues in an open letter, Nokia should invest in creating a wireless payment infrastructure in retail stores starting with western and northern Europe, much like DoCoMo did in Japan.

Whatever the next 2-3 years hold, mobile payments have great potential for bringing back the lost value to the Internet.

Comments welcome as always,

– Andreas follow me on twitter

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