Movie Revenue Model is Breaking

Sometimes the decline of a business model is historically inevitable even before the peak of revenues for the model.

Voice revenues for the U.S. telecom business peaked, historically, about 2000. Skype was launched in 2003. The Telecommunications Act of 1996, the biggest change in communications regulation in 60 years, occurred just before the Internet explosion.

DVD purchases and rentals likewise hit an inflection point about 2000. By about 2010, even Netflix was predicting the decline of the model.

Rentals from Redbox kiosks likewise seem to have passed an inflection point.

Some think the movie business is headed for a huge change as well, according to Adam Leipzig  Adam Leipzig, CEO of Entertainment Media Partners.

“Studios are incredibly profitable now, and studios will continue to be highly profitable for the next three to four years, largely because they have reduced the number of movies they make, and also because they are being much more conservative in the way they manage their finances,” said Leipzig. “In the future though, five or six years down the road, this cycle will come to an end.”

“The studio profitability will go down,” he argues. And content production will change. “I’d argue that the best writing and the best character development is generally happening on Web or TV series. I would include shows from Netflix, as well as cable networks.”

There is a reason. “Studio movies are big economic plays; most summer movies cost $200 million to make, and another $200 million to market,” says Leipzig.

So there is a tendency to “play it safe.” That tends to mean studios want franchises, and that means sequels. The value of a franchise is that it is easier to market. People already know what to expect from a particular movie that is a franchise.

Filmmaker Steven Spielberg says it's becoming harder and harder for even brand-name filmmakers to get their projects into movie theaters.

“The business model within film is broken,” says Amir Malin of Qualia Capital, a private-equity firm.

Between 2007 and 2011, pre-tax profits of the five studios controlled by large media conglomerates (Disney, Universal, Paramount, Twentieth Century Fox and Warner Bros) fell by around 40 percent, says Benjamin Swinburne of Morgan Stanley. 

Swinburne predicts the studios account for less than 10 percent of their parent companies’ profits today, and by 2020 their share will decline to only around five percent.

Some argue consumers are shifting towards in-home consumption, and away from out of home consumption. 

That is true, but even in-home consumption spending, in the U.S. market is flat, and down from a 2006 peak.

One might argue those trends augur well for independent producers and new types of outlets. One might also argue that the worsening economics of traditional studio-based movie making will shift attention and spending towards new methods.

That should favor outlets such as Netflix, at least some TV networks and independent producers. If these observers are correct, content innovation already is shifting away from the major studies and towards television-based networks and producers.

Apple Sticks to Strategy: No "Junk"

Apple long has had a "premium product" strategy, even if it occasionally has produced lower-cost versions of some products, such as the iPod. But the philosophy of "no junk" remains the watchword at Apple, according to CEO Tim Cook.

Does that mean Apple never will create a lower-cost iPhone? That might not be the relevant question. The bigger question is whether Apple ever will try to make devices at price points the Chinese mass market will buy. The answer to that seems an emphatic "no."

For better or worse, Apple simply does not presently see any reason to deviate from its strategy, and is willing to lose the smart phone operating system or device market share battles. 

Apple is banking on the smart phone market being different than the old PC market, where Apple never escaped a niche. If Apple is correct, the smart phone market will eventually shape up for Apple as being between the pattern of PCs and MP3 players.

Though it was a niche supplier in the PC market, and the dominant provider in the MP3 market, Apple's smart phone business will be somewhere in between. Apple won't dominate in terms of share, but Apple will be relevant. 

New Opposition to EC "Connected Continent" Plan

Virtually nothing in the realm of communications policy is without controversy. So it is that an association of national European regulators has expressed “concern” about the “rush” to get new regulations through the European legislature.

The Body of European Regulators for Electronic Communications (BEREC) says it is concerned that the proposed regulation is being rushed through the European legislature “without proper explanation and full exploration of its potential consequences, given that the proposals represent a shift away from the current approach (based on pro-competitive regulation) towards one that favors market consolidation.”

BEREC also argues the proposed European Union proposals to streamline regulation across the EU will increase risk, undermine national authority and reduce the likelihood of increased investment in next generation network facilities.

To be sure, controversy is normal whenever major changes in telecom regulation are proposed.

Service providers can be expected to object to the eventual end of roaming fees, provisions that will take revenue and profit out of international calling. Regulators might not support more centralization of spectrum policies and regulatory authority.

The “Connected Continent” proposal will upset some policy advocates who will not be pleased with the approach to network neutrality (allowing creation of managed services).

And many will continue to wonder where and how the funds to invest in next generation infrastructure will be found.

The “Connected Continent” plan, created by Vice President for the European Commission Neelie Kroes, might actually depress European service provider investment in next generation infrastructure, according to Strand Consult.

The main problem, perhaps, is that the proposal continues to favor “competition” at the expense of “investment.”

The proposal “will create price wars between operators, which will deliver lower prices for consumers in the short term, but remove incentives for operators to invest long term,” argues John Strand, Strand Consult principal.

BEREC says it also is concerned that the proposals represent a substantial shift in the balance of power between the Commission, member states and national regulatory authorities,

centralizing authority at the EC.

“These proposals risk undermining the ability of national regulators, whether acting individually or collectively, to take appropriate and proportionate regulatory action in all the relevant markets,” BEREC maintains.

Smart Phone, Tablet Adoption in Asia is Study in Contrasts

Saturation and unmet need both are parts of the smart phone adoption story in Asia. On one hand,  87 percent adoption in in Singapore and Hong Kong, followed by Malaysia (80 percent), Australia (75 percent) and China (71 percent), shows some markets are nearing saturation.

On the other hand, smart phone adoption in the Philippines stands at 15 percent. In  India penetration is 18 percent, while in Indonesia penetration is 23 percent, according to Nielsen.

In Southeast Asia, smart phone owners spent on average more than three hours per

day on their smart phones in June 2013, with activities such as chat apps, social networking and entertainment activities like games and multimedia driving the highest levels of engagement, Nielsen says.

                       Smartphone penetration, Asia, United States, Western Europe

                                              Tablet Penetration, Asia

What is the Revenue Model for Mobile Apps?

Every Internet or mobile app, operating system or browser, communications or entertainment service available to users without charge has to find a viable business model. For more than a decade, at a high level, the implicit hope, or explicit expectation, was that “advertising” would be the ultimate revenue model.

That implies high end user scale, something it is obvious most apps will not be able to attain. Over the past half decade, though, “commerce” and “transactions” have started to get more traction as a revenue model, and mobile apps are no exception.

Though initially many hoped or expected that apps would create a direct app sales revenue model, that is only partly true. Free apps will account for 91 percent of total mobile app store downloads in 2013, according to Gartner.

"Free apps currently account for about 60 percent and 80 percent of the total available apps in Apple's App Store and Google Play, respectively," said Brian Blau, research director at Gartner.

So what is the revenue model for the 91 percent of “free” apps? In a growing percentage of cases, revenue is generated by “inside the app purchases.”

Gartner estimates that in-app purchases will account for 48 percent of app store revenue by 2017, up from 11 percent in 2012 and 17 percent in 2013.

In other words, mobile apps will be, in most cases, the enabler for a revenue stream (selling things inside the app), not a direct revenue generator.

Mobile app stores will see annual downloads reach 102 billion in 2013, up from 64 billion in 2012, according to Gartner researchers, with total mobile app store revenue in 2013 will reach $26 billion, up from $18 billion in 2012.

As with most other parts of the Internet ecosystem, leadership is, and will be, concentrated. "iOS and Android app stores combined are forecast to account for 90 percent of global downloads in 2017,” said Blau.

Over time, it also is likely that users will stabilize their usage of apps that have the highest value, leading to a lower rate of new app downloads, though the trend might slow only gradually.

Average monthly downloads by  iOS users will decline from 4.9 in 2013 to 3.9 in 2017, while average monthly downloads by Android device users will decline from 6.2 in 2013 to 5.8 in 2017, Gartner predicts, as users develop strong preferences for some apps.

What isn’t so clear yet is the relative importance of tangible goods and services, compared to digital content goods, that will be purchased inside mobile apps. What is clear is that the business model for “free” apps will not be driven mostly by advertising, as might be the case for some Internet apps.

Mobile App Store Downloads, Worldwide, 2010-2016 (Millions of Downloads)

	2012	2013	2014	2014	2016	2017
Free Downloads	57,331	82,876	127,704	167,054	211,313	253,914
Paid-for Downloads	6,654	9,186	11,105	12,574	13,488	14,778
Total Downloads	63,985	102,062	138,809	179,628	224,801	268,692
Free Downloads %	89.6	91.0	92.0	93.0	94.0	94.5

Source: Gartner (September 2013)

Postpaid Wireless Data Revenues Dominate Telecom Revenue Growth

Postpaid mobile data revenues remain the U.S. telecom industry's growth engine, says Atlantic-ACM. Postpaid mobile data revenues will hit $130 billion by 2018.

"In fact, while postpaid revenues represented less than a fifth of the industry in 2012, they'll grow at 11.5 percent annually to represent more than a third of total industry revenues by the end of the forecast period," said  Douglas J. Barnett, Atlantic-ACM senior analyst.

Revenue growth has been lead by mobile data for several years, according to Pyramid Research. 

Even in the event of a dramatic escalation of price competition in the U.S. market, the trend is likely to remain intact, as it is expected voice services will take a revenue haircut as service providers try to maintain data revenue growth while still facing a need to cut prices.

It's the same principle as price discounts for triple-play bundles. When a bundle price is cheaper than buying three services separately, something is being discounted, though the discounting is hidden. 

Since video entertainment prices cannot easily be cut without erasing profit margins, and since mobile data is leading growth, that means the declining voice service is where the actual price declines will mostly fall. 

ISPs Drop Gigabit Service Pricing from $300 a Month to $70 a Month

EPB, the Chattanooga, Tenn. supplier of 1-Gbps service, has dropped its gigabit service rate from $300 a month to $70 a month, a reaction to the price umbrella Google Fiber apparently is creating.

EPB also converted all existing customers with 100 and 250 megabit-per-second services to the the gigabit speed.

Separately, Utopia, which operates a wholesale gigabit network in about 10 Utah cities, also says its retail ISP partners have dropped prices for gigabit access from about $300 a month to $65 a month to $85 a month.

To the extent that Google Fiber intended to influence investment in faster ISP networks, and create new price points, Google Fiber seems to be succeeding.

U.S. Mobile Market Disruption Will Not be Easy

Based on SoftBank's ability to shake up the Japanese mobile market, many observers expect a similar assault in the U.S. market, from a SoftBank-owned Sprint. SoftBank entered the market by buying Vodafone's Japan assets in 2006.

In just one year, Softbank managed to boost its subscriber base from 700,000 in fiscal 2006 to 2.7 million in fiscal 2007.

By the beginning of 2008, Softbank had grabbed 44 percent of Japan’s new mobile subscribers, well ahead of KDDI’s 35 percent and NTT-DoCoMo’s 11 percent.

Softbank’s “White Plan” was important, offering  offering free peak-time calls on SoftBank’s network.  

One key point was SoftBank’s willingness to sacrifice voice average revenue per user  to make market share gains. Back in 2006 to 2008, Softbank was willing to accept a stunning $13 overall ARPU decline.

SoftBank’s exclusive right to sell Apple’s iPhone, obtained in 2008, did not hurt, either.

It won't be as easy the second time, as voice prices are fairly reasonable in the U.S. market, on-network calling circles are common, and there will be no equivalent of the Apple iPhone exclusivity.

SoftBank strategists likely are hard at work trying to find some equivalent value, but the point is that it will not be easy to disrupt the U.S. market, especially when carriers are free to match key offers.

An example can be gleaned from the recent T-Mobile US effort to unbundle device purchases from recurring service charges. The “Jump” program--allowing faster device upgrades-- likewise was intended to differentiate T-Mobile US from its key competitors.

But the advantage is blunted when all the other carriers match the offer.  AT&T launched  its own program "Next," while Verizon launched  "Edge," substantially matching the T-Mobile US offer. Sprint now has followed with One Up, launching Sept. 20, 2013 and allowing Sprint customers to buy a new phone with no money down, paying for devices in installments over two years.

The move by Sprint means all four of the large national carriers offers such a program, and shows how hard it will be for T-Mobile US or  Sprint to truly disrupt the U.S. mobile market.

Some might argue the T-Mobile US campaign now will need to change yet again, allowing T-Mobile US to argue it is forcing the rest of the industry to change, and attempting further changes in retail packaging.

T-Mobile US might argue its competitors still have not truly matched its offers, given remaining price differences, especially between T-Mobile US and Sprint, on one hand, and AT&T and Verizon Wireless on the other hand, at least for single device accounts.

Just how much Sprint might be able to attack retail packaging or pricing levels, until the other carriers (or at least AT&T and Verizon Wireless) are unable to keep matching the offers, remains to be seen. But that is likely to be key to whether Sprint or T-Mobile US are able to significantly and permanently change market share in the U.S. mobile market.

Multi-Sided Markets are Complex, Therefore Slow to Emerge

Single-sided markets are relatively simple: there is just one type of buyer. Internet service providers, mobile service providers and fixed network service providers are examples.

There are other models, though, even in the network services business. Cable TV operators, for example, operate in two-sided markets, earning revenue both from end users and business partners.

Many of the newer markets service providers are entering, or have entered, are much more complicated. Those multi-sided markets require construction of more-complex value chains, and therefore take longer, and are tougher, to successfully create, according to Rajesh Kandaswamy, Gartner analyst.

Many of the hoped-for new businesses, such as any ways network services are exposed to third parties, are two-sided models, where revenue is earned from end users and business partners. That’s a more-complex business, creating multiple required ecosystem connections.

For a service provider hoping to earn revenue from advertising or content delivery network services, for example, service providers must maintain a critical mass of customers that advertisers want to reach, and then entice marketers to pay money to reach those prospects.

Some of the new revenue streams might be even more complicated. A connected car service, for example, could be a one-sided business (where a mobile service provider sells only to a automobile manufacturer), or a two-sided business, where a service provider sells direct to its existing customers, as well as to a partner auto manufacturer.

Mobile payments so far represent the most complicated, multi-sided ventures. The current system already has many participants. Card holders, card issuers (bank), card networks (Visa / MasterCard), merchants, and acquirers (banks and processors) are the primary stakeholders.

By definition, a payment network is multi-sided. Adding mobile payments inserts the mobile service provider into the value chain as well, and may or may not pose a threat of competing with other participants.

Multi-Sided Payment Ecosystem

In the simplest possible implementation of mobile payments, the mobile phone replaces the plastic card.

In a more-disruptive scenario, mobile services actually displace one or more of the existing participants.

But any multi-sided market is more complex to create or modify since it requires agreement of other participants in the value chain, some of which might resist the change, precisely because entry of the mobile payments participant can cannibalize revenue or threaten displacement of an existing provider from a role in the value chain.

That is one reason why mobile payments will take some time to develop as a mass market.

66% of All Mobile Phone Users Use Internet on Their Mobiles

Google Wallet Can be Used by Any Android Running Version 2.3 or Higher

It is not directly a commentary on the value of near field communications, but Google’s introduction of a new version of the Google Wallet app, rolling out the week of Sept. 15, 2013, is part of Google’s overall approach to apps, which is to make them available on all platforms.

The latest addition makes Google Wallet usable by all Android phones (version 2.3 and higher), in the United States. That means there is no need for NFC capabilities on the devices.

The updated app allows users to easily send money on the go, store loyalty cards, save money through offers, and view all your Google Wallet activity, Google says.

Using the Google Wallet app, users can easily and securely send money on the go to any friend in the United States with an email address (ages 18+). It’s free to send money directly from your bank account or Google Wallet balance, and low fees apply when using a linked credit or debit card.

With the new Google Wallet app, users add cards by scanning barcodes or inputting the card number into the app. The next time you’re at the store, you can earn points for your loyalty program by scanning the app at checkout, said Peter Hazlehurst, Google Wallet director of product management.

In addition to loyalty cards, all offers from the Google Maps app, Google Search, Google+ or Google Offers are visible and redeemable in the Wallet app at checkout.

Google Wallet also can be used to to pay on Google Play, select mobile websites or a growing set of Android apps.

The new version is available on the Google Play Store.