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Unified Communications: July 28, 2011 eNewsletter
July 28, 2011

Why 'Apps' Will Not be a Major Opportunity for Telcos

By Gary Kim, Contributing Editor

To give you some idea of how hard it actually is for a large communications carrier to create a new line of business that has a meaningful impact on revenue, consider an analysis Tristan Louis at recently conducted. He took a look at valuations and implied average revenue per user for some of the leading Internet companies, including Pandora, LinkedIn (News - Alert), Groupon, LivingSocial and Zynga.His analysis suggests it is possible to generate between $3.57 and $4.58 per user per year. By the same token, it could be possible that a user is worth between $106.46 and $126.24 over the user’s lifetime to a publicly traded web 2.0 company.

Obviously, those figures assume a telco or cable company could capture all revenues from such businesses in areas as disparate as streaming audio, gaming, social networking or social shopping (mobile coupons, some would say). It is worth noting that none of those businesses today have any revenue sharing with any telcos.

But assuming such deals were contemplated, you can see the problem. Even if a telco could somehow create enough value for any of these services to create a role in the revenue stream, the net result is that the effort is more trouble than it really is worth. Assume an average of $4.25 annual revenue per user.

Assume a telco could create enough value to warrant a revenue share of five percent of gross revenue. That would imply annual incremental revenue of 21 cents a year, or less than two cents a month, per subscriber.

If one assumes a large telco has to see a top-line revenue opportunity of roughly $1 billion to bother chasing the opportunity, one typically has to assume revenue potential in the dollars a month per subscriber range, ranging in many cases from $10 to $20 per user, per month, to be reach that level of significance.

As popular, or promising, as such new lines of business are, they would not likely raise revenue enough to be worth any serious effort by a major telco. Generally speaking, that means most “application” related initiatives by the large telcos will be tough to justify. Consider virtual goods purchased by consumers to use in their online games.

Not everyone buys virtual goods in mobile games. But among those who do, the average purchase price is pretty big: $14, according to Flurry. Consumers spend average of $14 per transaction in iPhone and Android (News - Alert) freemium games.

Flurry’s latest data is based data from 3.5 million consumers. About 71 percent of the transactions were for $10 or under. About 16 percent were for $10 to $20. In the under $10 category, most of the transactions were at the $9.99 level, followed by $4.99 and then 99 cents. Consumers spent 99 cents less than two percent of the time.

Nor are those sorts of expenditures a “recurring revenue” sort of item. Purchases happen episodically. To be sure, a user spending $50 a year on digital goods might represent $4 a year worth of revenue, but only a fraction of total consumers will do so, so the ARPU, spread over the entire customer base, will be quite small.

Broadly speaking, large global telcos have a handful of promising new revenue opportunities, including financial services (mobile payments is part of this), machine-to-machine services, mobile advertising or specialized services provided to some business verticals, such as health care or security, for example.That’s about it. In the near term, most of the revenue will come fairly directly from “things service providers already do.”  

The good news, broadly speaking, is that global service providers have managed one major revenue transition already, are well down the path to completing a third transition, and strategically already are working on a third major transition. 

The first transition was a shift of about half of total revenue from international and national long distance to wireless. As the recent AT&T and Verizon (News - Alert) second quarter reports show, those firms are well down the path of replacing half of their landline voice revenues with broadband revenues.

And the next transition, which will replace half of current wireless revenues with “something else,” is under active planning and activity. In the near term, other contributors will develop.

In the near term, be related to video services revenues and other enhancements related to broadband services. In the long term, the fundamental drivers will have to shift more significantly. 

Want to learn more about the latest in communications and technology? Then be sure to attend ITEXPO West 2011, taking place Sept. 13-15, 2011, in Austin, Texas. ITEXPO (News - Alert) offers an educational program to help corporate decision makers select the right IP-based voice, video, fax and unified communications solutions to improve their operations. It's also where service providers learn how to profitably roll out the services their subscribers are clamoring for – and where resellers can learn about new growth opportunities. To register, click here.

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Jennifer Russell


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