Advertising and the future of wireless

As carriers face pressure from Web companies, they seek alternative revenue sources

Let's say you're an enterprise that manages a large fleet of vehicles using location-based services to track cars in real time.

And let's say your telecom carrier tells you they will cut the price of your monthly LBS bill in exchange for letting them show you a brief advertisement every time you accessed the service. Would you accept their offer?

The willingness of customers to tolerate advertisements as part of their telecom services has been an issue that telecom carriers have been grappling with lately as they contemplate how to maintain their revenues and avoid being relegated to providing "dumb pipes" that only connect customers to the Web without offering any value-added services.

Carriers are looking at advertisements as a source of revenue, says ABI Research analyst Dominique Bonte, because location-based services such as vehicle fleet management, navigation and family finders haven't been as successful as carriers had hoped. In North America this year, for instance, ABI projects that LBS will account for roughly $US1.5 billion in revenue, which would represent a small portion of the revenues generated by the telecom industry as a whole. Last year, for example, AT&T and Verizon generated combined revenues of more than $US141 billion.

"The reason why LBS hasn't taken off as many people would have expected is the fact that it's fairly expensive to maintain,"  Bonte says. "Most of the location-based applications are available for a monthly fee. Some of the enterprise apps are around $US25 extra per month per device. So far, adoption has stayed within a small segment of early adopters."

So in order to lower the costs of LBS to users, carriers are considering implementing advertisements that will soak up some of the cost of maintaining the services and thus drive down the price. Kittur Nagesh, a director of service provider marketing at Cisco, says that one of the goals of Cisco's service provider division is to help telcos upgrade their networks to better handle LBS and to offer specialized advertisements. For instance, the company has provided European carriers T-Mobile Hungary and Network Norway with its Content Services Gateway to help improve their personalized content offerings and billing capabilities. As Nagesh sees it, carriers have to upgrade their networks to offer more LBS and ads in order to keep their revenues strong.

"If the intelligence in the network is not there, then the operator will be relegated merely to a transport service," he says. "They're not seeing any revenue from Web services such as Flickr or YouTube, but the ecosystem is now ready to give them a piece of the action. I believe ISPs have a goldmine in their hands and they haven't unleashed it yet."

When asked how ISPs should best utilize advertisements to generate revenue without annoying their users, Nagesh says that it would require a system of trial and error to determine the most effective methods.

"I believe this will be a journey the industry has to take," he says. "Obviously they will have to show ads that are relevant to users in their locations. So if you're looking at highlights from a game over the network, you'll have to look at an ad first. Or maybe while you're waiting for a download to finish, the carrier gives you a 30-second ad. If the ads are relevant then the threshold of tolerance will be higher."

Gartner analyst Tole Hart expresses more skepticism about how much advertising for LBS will add to telcos' revenues, however.

"Advertising on mobile phones is a good way to generate revenues but it won't be close to what carriers make on access charges," says Hart, who estimates that global revenues from mobile advertising will total between $US11 and $US12 billion this year. "I certainly think it's worthwhile because eventually advertising will become a bigger piece as smartphones become commonplace. But it's not going to be huge."

Bonte is also somewhat skeptical about how much advertising will contribute to carriers' business models and says that carriers may simply have to live with less revenues than they prefer if they want to remain relevant.

"Despite the appeal of location-based advertising, it remains to be seen how much revenue can be generated from it," he says. "Certainly there is interest from customers who want to use LBS, but they simply don't want to pay too much for it... In terms of subscribers, we project that there will be around 245 million LBS users by 2014, but the question will become whether they pay for it or will it be predominantly free and supported by advertising."

Bonte thinks that that carriers' best options going forward are to either offer unlimited LBS as part of an "unlimited everything" set at a fixed monthly rate plan similar to what Sprint is currently offering for mobile voice, SMS and data services, or to open up their networks more to allow more third-party developers to create value-added applications and services more affordably. While Bonte acknowledges that the latter arrangement has been resisted by carriers for a long time, he says that they may have to do it in the end to maintain their market positions.

"It comes down to either losing out completely on what's happening or getting a piece of the pie," he says. "And it's better to be dumb pipe that has some piece of the pie than to be left out completely."

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