Why the mobile industry must change its charging model - read the warning signs

The 2008 mobileYouth report published May shows although mobile Youth globally spend over $300 billion annually on this industry, young consumers are now spending less per head on mobile than they were a year ago. Fewer youth are downloading mobile music and games.

We have reached the ARPU Ceiling.

Why?

When RIAA legal team spokesperson Jonathan Lammy pronounced victory on the court steps of Minnesota over the “theft” of music files by file sharer Jammie Thomas, the record industry congratulated itself for winning and important battle in their ongoing drive to close down small scale consumers who were simply no longer willing to pay for the content in the way they were used to. By drawing parallels between theft and file sharing the industry had, in its mind, successfully raised the debate from one of consumer inconvenience to a moral level which ultimately gave them leverage in the court room.

The PR war, however, was lost. Recorded music sales continued to fall for their 5th successive year and key artists such as Madonna, Radiohead and NIN decided that the labels no longer offered them the most effective marketing and distribution channel for their content. Furthermore, the association of artist with the actions of labels who were suing their own customers in order to defend an unfavoured charging model became risky - content owners decided to go it alone.

The music industry failed to pre-empt change.

It is the same wave of change that is gently breaking on the shores of the mobile industry. Perhaps the waves are too gentle. A Youth ARPU decline of $30 to $29.50 is off the radar of most operators. What should be square on their radar is the basic fact that youth are increasingly unlikely to pay for the content the way that the industry would like. And if any group of consumers lay claim to being the harbinger of our industry fortunes, it is the young consumer. Consider their contribution to bringing SMS, ringtones and SNS to the mass market.

Rather than read the signs and maximize the opportunities they presented, labels sought to dig in their heels by taking defensive measures to protect both legally and technologically their IP. The industry had made a calamitous judgement on the source of the threat presented to their market position. It wasn’t the consumer or the product at fault but the charging model. Youth have and always will be willling to pay for music, just not in the outdated terms the record industry were clinging on to.

Done differently, the labels would be in a different position today. An industry that had been historically difficult to break into as a supplier due to the barriers to entry afforded by economies of scale, control of IP and distribution, had within a decade become open to new players who operated with high levels of consumer trust. As traditional charging models folded with the disappearance of entities such as Tower Records, new ones appeared in the form of Apple’s Itunes or LastFM.

Throughout the legal battles, youth’s need and loyalty to the product - ie music - remained constant. As a social tool it continues to fulfil the two key drivers of youth consumer behavior - the need to be significant and the need to belong. Each generation had maintained the social behaviors of its predecessor yet invoked the interaction through the lens of the latest technology - the sharing of singles became tapes and tapes eventually became file sharing.

When Radiohead offered its album on a “pay as you’d like basis”, critics suggested most people wouldn’t pay. They were right, 64% freeloaded. But that doesn’t overshadow the $10m in royalties that Radiohead netted from those that did. When the Daily Mail offered Prince’s latest album for free on the front cover of the newspaper, the artist reportedly forfeited $5.6 million in royalties. Within 6 months however, he had grossed over $32 million in concert ticket sales in the UK largely as a result of this promotion.

Mobile still seeks to optimize the transaction. It still seeks short term return and invests nothing in the relationship. Every payment must count. And, as long as we continue to use ARPU as the yardstick of effectiveness we have no option but to follow through on this measurement.

When you turn up for dinner party at a friend’s house, you bring a bottle of wine or a gift. All relationships first start with the act of giving. When other industries - from airlines to music providers are experimenting with giving away their most expendible services for free, the mobile industry has turned up at the party empty-handed except for plastic bags determined to take as much as it can. When every transaction is maximized, nothing is given away.

The record industry’s tale is one of an industry that failed to pre-empt change - ie a disconnect between what the next generation (youth) viewed as a fair value transaction for the content. It was never that they saw the content as cheap because youth always value music - youth continued to consume merchandise, concert tickets and ringtones. However, monetizing the new opportunity required not a shift in tactics but in strategic thinking - from being a provider of recorded music to a platform for all music, from focusing on maximizing their revenues from each transaction to maximizing the overall spend on music, from defending their “slice” of youth’s spending pie to increasing their influence on the pie as a whole.

By setting the tone, industry leaders can invoke change. Tone embodies the company need to refocus direction based on the challenges ahead. Rather than change tone, music industry leaders sought to change the consumer - a move which turned out to be extremely costly in the long run and ultimately has limited the long term opportunities for these providers to grow profitably.

Mobile is at the cusp of a sea change that will alter our expectations of charging irrevocably. When attention becomes our biggest cost providers need to change their business models accordingly. When ARPU drives us to short term transactional based thinking, CEOs need to initiate change to restructure the DNA of their organizations.

Youth loyalty to mobile providers is in decline. Churn stands above 33%. Only 27% of youth “trust” their operators according to our 2007 report. Why? Because how we measure our growth potential creates charging models that manifest as short term revenue maximization over relationship building.

We can ride this out because mobile is wealthy and has many consumers to help weather the storm. But then, back in the 80s, so was the music industry. Complacency is potentially irreversible.