The Broken Subscription Model

Over the past couple weeks, I’ve caught-up with a few different folks in the SMS aggregation and premium SMS content business and for the first time, I have some real numbers as to what the premium content return-rates are on different carriers. First some quick background, the US is unique in that it’s one of the few countries that allows for an opt-out subscription. An opt-out subscription is when you have to tell the provider that you want to unsubscribe – until you do so, you are automatically billed each month. This in contrast to an opt-in subscription (ie most operators in EU) where you have to re-opt-in at the end of each month.

As you can imagine, an opt-in subscription is quite painful for a content provider since they can’t bank on things like breakage – the fancy term for “I forgot that I’m subscribed (and I keep paying them)”. Most mobile content companies bank on breakage – it’s a fundamental piece of their biz model which is fine as long as the customer (subscriber) knows what he’s subscribing for. Where this starts breaking-down is when you start seeing applications that use nefarious or mis-leading marketing techniques to get new customers such as the Facebook quiz I recently took, which required subscribing to a $9.99/month subscription to get your quiz results. If you didn’t notice the fine-print at the bottom, you would have been subscribed when you clicked “See my results”!

As a result, most mobile content companies are facing numerous class-action law suits and most US carriers are facing huge premium return rates – see PhonePayPlus for some of the adjudications in the UK. This is how it breaks-down (estimates):

AT&T: 20-25%
T-Mobile: 15-20%
Sprint: 7-12%
Verizon: 5-10%

20-25% of all PSMS subscriptions on ATT are returned – insane! Just to translate this, the average Level 1 customer service call is $10-15 (Level 2, which these probably never get to are approximately $40). The interesting ratio here is the potential revenue earned from subscription breakage versus the customer service call volume and it’s affect on customer retention. Also interesting is how the refund policies or inclination to offer a refund vary amongst the different operators. In any case, this acceptable is about to get flipped upside down with Sprint recently announcing that starting Oct, 09, any premium content provider who results in a 7%+ return rate for 3 consecutive months will have their PSMS shortcode pulled! Is Sprint ready to shut down the millions in breakage revenue? And the bigger Q is whether other carriers follow-suit – this will be absolutely detrimental to the mobile content industry in the US – the “ringtone” pain, has maybe just begun…

What Do Bankers Do?

When I used to live in NYC (for 2 yrs in 01), I didn’t really know anything about finance. Well, when living in NYC, you learn pretty quickly and I realized that a big part of a bankers job is coming up with these fancy “instruments”, basically new ways to trade (lose) money, ha! (ie instead of buying currency, buy futures on the currency or options on the currency, the list goes on).

Anyways, how does this relate to mobile? The mobile content industry is in some pain. It’s still, w/o a doubt, the majority of data revs (sans SMS), over 10B last yr as compared to sub-1B in mobile advertising (although the buzz is in the latter); however, the revenues have gone flat and growth has really stalled. This can be attributed to a number of things:

1. Std’ization of content formats (ie MP3 as a ringtone format)
2. iPhone teaching people they can sideload (install from the computer) content
3. Growth of smartphones enabling more sideloading
4. More storage meaning full MP3s or large images can be installed w/o concern
5. Proliferation of laptops meaning more Bluetooth making it even easier to sideload
etc. etc.

I know this first-hand since I used to run ToneThis which enabled ringtone creation.

In any case, if less people are buying premium and more are side-loading, what does the mobile content industry need to do? I think the key is in recycling – it’s not about the music itself, it’s about developing new and clever ways to personalize your phone. For example, push ringtones, ringbacks, push vibetones, 3D vibetones… the list goes on.

The nice thing about many of these new emerging content types is they require carrier infrastructure / buy-in – normally, I’d say that’s not a good thing but from a publisher stdpt, this means, the user can’t sideload the content, so the risk of “leakage” becomes nullified and the bonus is you can likely charge a subscription meaning recurring revs.

Fewer unique customers but significantly great revs per customer. Bankers, we can use your help in coming up with some more creative personalization types (ie “instruments” ๐Ÿ™‚